PAS2 - INVENTORIES

RECOGNITION

A. DEFINITION
. Inventories are assets which are held for sale in the ordinary course of business, in the process of production for such s
or supplies to be consumed in the production process or in the rendering of services.

INVENTORIES

Held for sale in the In the process of

ordinary course of production for such
business sale

Work in Process
Nature of Business

(Service)
Operations

Merchandise Inventory
(Trading)

Finished Goods Work in Process

(Manufacturing) (Manufacturing)

MEASUREMENT
INVENTORIES are measured at Cost or Net Realizable Value (NRV), whichever is lower. [LCNRV]
INVENTORIES are measured at Cost (it is assumed that cost is equal to or less than Net Realizable Value (NRV). -

B. COST OF INVENTORIES
There are inventories that are purchased by the entity like the merchandise inventory of the trading business, the materials
manufacturing business, and the service supplies of the service business.

. COST OF MATERIALS INVENTORY AND COST OF MERCHANDISE INVENTORY

(Both inventories are purchased by the entity)
a. The cost of these inventories includes the COST OF PURCHASE which comprises the following:
system) or Purchases Periodic

a1. Purchase price or acquisition cost (Invoice price)

DEBIT Inventory (Perpetual

a2. Import Duties (Bureau of Customs)

Ÿ These are taxes collected on imports (buyer) and some exports by (seller) a country's customs authoritie
a3. Irrevocable taxes OR PURCHASE TAX (Bureau of Internal Revenue)- example is if the entity is a
TAXES

purchased the inventory from a VAT-registered business.

System)

Ÿ Buyer - input tax (based on amount purchased)

(a) VAT- Registered - account separately the Input VAT (Tax is recoverable)
(b) Non-VAT Registered - Include the Input VAT in cost of purchase (Tax is not recove
Ÿ Seller - output tax (based on selling price), if VAT-Registered only
a4. Freight - as buyer this is Freight-in (also called Transportation - in or Inward Transportation)
a5. Handling cost like warehouse storage costs, shipment cost, and packaging cost.
a6. Other costs directly attributable to its acquisition
 b. The following are deducted in determining the COST OF PURCHASE
b1. Trade discounts (deduct from List Price)
b2. Rebates
Ÿ
This is the amount paid by way of reduction, return, or refund on what has already been paid or contrib
b3. Returns and allowances
b4. Cash Discount - as buyer this refers to Purchase Discount which is deducted from Purchases. (gross or net ME

c.
Not included in COST OF PURCHASE is the foreign exchange difference particularly imported materials or merc

d. Based on the above discussion, the cost of purchase can be computed using the following format of computation:

Cost of Purchase:
Purchase price (net of trade discount; at invoice price)
Import duties
Irrevocable taxes
Freight
Handling cost
Other costs directly attributable to its acquisition
Total cost of purchase
Reduction in cost of purchase:
Rebates Credit - Rebates from Purchases
Returns and Allowances Credit - Purchase Returns and Allowances
Cash Discounts Credit - Purchase Discounts
Total cost of purchase (net)

. COST OF INVENTORIES OF WORK IN PROCESS AND FINISHED GOODS OF A MANUFACTURING BUSINESS

(Both inventories pass the production process)
Aside from material costs, other costs that are included as cost of work in process and finished goods of a manufacturin
CONVERSION and OTHER COSTS.

Work in Process Finished Goods

Direct Materials cost xxx xxx
Conversion Direct Labor Cost xxx xxx
Cost Factory Overhead xxx xxx
Other costs xxx xxx

a. COST OF CONVERSION.
In manufacturing, the costs of conversion includes direct labor and factory overhead.

a1. DIRECT LABOR COSTS

Ÿ This is directly related to number of units produced.
Ÿ The more units are produced, the more labor hours are needed.
Ÿ The more labor hours are used, the higher the Direct Labor Cost.
Ÿ Therefore, it is classified as VARIABLE COST OF PRODUCTION.

a2. FACTORY OVERHEAD

Ÿ Also called as manufacturing overhead, production overhead, or factory burden.
Ÿ This can be fixed costs or variable costs.
(a) FIXED PRODUCTION OVERHEAD is the indirect cost of production that remains relatively cont
(quantity) of production). Examples are:
ü Depreciation of property, plant and equipment using the straight-line method (SLM)
ü Fixed rental of factory building and office
ü Fixed salaries of production personnel (other than laborer but salaries are monthly basis)
ü Other cost of factory management and administration

Notes:
Unallocated fixed overhead is recognized as expense in the period in which it is incurred.
 (b) VARIABLE PRODUCTION OVERHEAD is the indirect cost of production that varies directly with
Examples are:
ü Indirect material cost (if the problem is silent)
ü Indirect labor cost (if the problem is silent)

Ÿ Comparison between fixed costs and variable costs

Volume (Qty.) Volume (Qt.y)
Total Cost Increases Decreases Unit Cost Increases Decreases
Fixed Constant Constant Fixed Decreases Increases
Variable Increases Decreases Variable Constant Constant

b. OTHER COSTS
These are costs incurred only to the extent in bringing the inventories to their present location and condition
following:
Ÿ Cost of designing the products for specific customers (customized products).
Ÿ Non-production overhead for specific customers.
Ÿ
Borrowing costs (refers to Interest Expense from borrowings) - if inventories that are produced
substantial time of amount to create (Debit to Inventory). HOWEVER, it is not required to capitalize t
manufactured in large quantities and on a repetitive basis (Debit to Interest Expense)

c. EXCLUDED AS COSTS OF INVENTORIES

These costs are excluded as costs of materials inventory, work-in-process inventory and finished goods invent
business. These include the following:
Ÿ Abnormal amounts of wasted materials, abnormal labor and other production costs (due to inefficienc
Ÿ Storage costs, unless these costs are necessary in the production process prior to a further production
production process).
ü Storage costs on GOODS IN PROCESS are CAPITALIZED.
ü Storage costs on FINISHED GOODS are EXPENSED.
Ÿ
Administrative overheads that do not contribute to bringing the inventories to their present location and
Ÿ Distribution or selling costs like salesman's commission, promotion and advertising expense, and freight-
the fibished goods to location of the buyer.
Ÿ Interest cost when inventories are purchased with deferred settlement terms.
Ÿ
Foreign exchange differences arising directly on the recent acquisition of inventories invoiced in a foreig

. COST OF INVENTORIES OF A SERVICE PROVIDER

The cost of inventories of a service provider may simply be described as WORK IN PROCESS and consists primarily o
a. Labor costs - salary of laborers
b. Other cost of personnel directly engaged in providing the service like salary of supervisory personnel and other at

Notes:
Excluded as costs of work in process inventory are labor and other costs relating to sales and general administrativ
the top management and accounting personnel including HR personnel. These expenses are recognized as expense
incurred.

Transaction 1:
Incurrence of related service cost:
Work in Process xxx
Appropriate account xxx

Transaction 2:
Upon completion of services.
Appropriate account xxx
Work in Process xxx

C. ITEMS INCLUDED AS INVENTORY AT THE END OF THE REPORTING PERIOD

.
To qualify as the items as included in the Inventory at the end of the reporting period for financials statements purpose
TITLE TO THE GOODS REGARDLESS OF ITS LOCATION is necessary to identity and consider.
 To qualify as the items as included in the Inventory at the end of the reporting period for financials statements purpose
TITLE TO THE GOODS REGARDLESS OF ITS LOCATION is necessary to identity and consider.
a. If the title to the goods remain with the seller, such inventory items will be included in the Inventory, ending of the
In effect,
Ÿ The seller has no accounts receivable and sales to be recognized in its accounting books.
Ÿ The buyer has no accounts payable and purchases to be recogized in its accountingh books
b. If the title to the goods passed already to the buyer, such inventory will now be included in the Inventory, ending
seller. In effect,
Ÿ The seller must recognize accounts receivable and sales in its accounting books.
Ÿ The buyer must recognize accounts payable and purchases in its accounting books.

. GOODS IN TRANSIT
a. Goods in transit means the goods is on the stage of delivery. It is usually in the middle of somewhere else between
the buyer like ocean or seas.

b. Who owns the goods in transit?

Ÿ Under FOB SHIPPING POINT term, the goods in transit is owned by the BUYER. The passing of title to the
receipt by the buyer at the sea port where the seller shipped the goods.
ü
The seller should recognize Accounts Receivable and Sales in its accounting books, and exclude the g
end of the accounting period. Under perpetual system, the seller should also recognize Cost of Sales in
ü Accordingly, it is the BUYER who is legally responsible for freight charges and other expenses from the p
of destination.

Ÿ
Under FOB DESTINATION term, the goods in transit is owned by the SELLER. The passing of title to the goo
receipt by the buyer at the point of destination which is the sea port where the buyer is waiting for the goods.
ü
The seller should not recognize Accounts Receivable and Sales in its accounting books, but include th
the end of the accounting period. Under perpetual system, the seller should not also recognize Cost of

c. What actually happened in practice?

Regardless of the precise moment at which title passed:
Ÿ The SELLER recognizes sales when goods are SHIPPED.
Ÿ The BUYER recognizes purchases when goods are RECEIVED.

Notes:
At the end of the accounting period, the accountant, by referring to corresponding invoices, must determine who h
goods. Otherwise, the affected accounts will be overstated or understated which require adjusting journal entries t
balances of the affected accounts in the financial statements.

d. Exception to the legal test

Exception to the legal test are INSTALLMENT CONTRACTS because the title to the goods remain with the SELLER u
paid by the BUYER.

On the contrary, the goods are included in the inventory of the buyer and excluded from the inventory of the seller
SUBSTANCE OVER FORM.

This will be discussed in detail in higher accounting course.

. CONSIGNED GOODS
a. CONSIGMENT is a method of selling goods in which the manufacturer delivers the goods to another party with the
goods on a commission basis.

b. Two parties in consignment

b1. CONSIGNOR
Ÿ The manufacturer and owner of goods delievred to another party.
Ÿ At the end of the reporting period, the goods are not physically present in its location or place.
Ÿ The consigned goods are included in its Inventory at the end of the accounting perio
another party.
Ÿ Upon sending of goods, no sales transaction is recognized in its accounting books.
Ÿ Freight and handling charges on goods our on consignment are part of the cost of goods consigned.
Ÿ The cost of consigned goods must be disclose in the notes to the financial statements under the line item
 The cost of consigned goods must be disclose in the notes to the financial statements under the line item

b2. CONSIGNEE
Ÿ The other party who receives the goods from the manufacturer (consignor).
Ÿ It is the party who displays the goods in its store and sell these on a commission basis.
Ÿ At the end of the reporting period, the goods are physically present in its location or place.
Ÿ The consigned goods are excluded in its Inventory at the end of the accounting period
no passing of its title from seller to buyer.

. INVENTORY ITEMS FOUND DURING PHYSICAL COUNTING INCLUDED AS ENDING INVENTORY

These include the following and to be recorded at COST:
a. Items counetd in the bodega or warehouse
b. Goods sent out on consignment and unsold at reporting date (as consignor), or goods in the hands of the consigne

c. Returned items by customers ( already in receiving department)

d.
Items ordered and already in the receiving department whether the corresponding invoice is already received or no
e. Items ordered but goods not yet received (In Transit) although the corresponding invoice is already received. The
Point.
f. Items ordered but goods not yet received (In Transit) although the corresponding invoice is already received. The
Collect or already paid by the buyer.
g. Items on counter for sale.
h. Items in shipping department (it is the shipping department of the seller and not at the sea port)
i. Items shipped today and the corresponding invoice is already mailed but the term is FOB Destination
j. Items currently being used for window display.
k. Finished goods still in factory or production area
l. Finished goods in company-owned retail store.
m. Finished goods out on approval
n. Work in process or goods in process
o. Factory supplies or Indirect Materials which include the following:
Ÿ Gasoline and oil for testing finished products
Ÿ Machine lubricants
p. Defective materials returned to suppliers for replacement
q. Materials Inventory
r. Finished goods held by salemen

. INVENTORY ITEMS FOUND DURING PHYSICAL COUNTING EXCLUDED AS ENDING INVENTORY

These exclude the following:
a. Damaged goods (merchandise inventory or finished goods)
b. Unsalable goods (merchandise inventory or finished goods)
c. Items specifically segregated per sales contract
d. Goods held on consignment (as consisgnee)
e. Goods sent out on consignment and already sold at reporting date (as consignor)
f. Items ordered but goods not yet received (In transit) although the corresponding invoice is already received. The r
Destination.
g. Items ordered but goods not yet received (In transit) although the corresponding invoice is already received. The r
Prepaid or already paid by the seller.
h. Items in receiving department but refused by the entity (buyer) because of damage.
i. Items shipped today and the corresponding invoice is already mailed and the term is FOB Shipping Point.
j. Unexpired insurance on inventories (Prepaid insurance)
l. Shipping supplies (Prepaid Expense)
m. Advertising catalogs and shipping cartons (Prepaid Expense)
n. Advance payment for materials ordered.

D. RECORDING PURCHASES OF MATERIALS AND MERCHANDISE INVENTORY

. TRADE DISCOUNTS are deducted immediately from the list price or catalog price to determined the amount to be rec
inventory.
a.
Trade discounts are expressed in percentage like 20% which means only 80% of the list price will be recorded as c
there are two or more trade discount rates given, the deduction of these discount is one at a time.
b. Trade discount is not recorded in the accounting books of the buyer or purchaser.
c. Trade discount is given to encourage the buyer to purchase in volume or in bulk.
d. Trade discount is given to buyer during acquisition of the products.
 . CASH DISCOUNTS are given to customers to encourage early payment of accounts.
a. Cash discounts are expressed in any of the following:
Ÿ 2/10 means a 2% discount will be granted to customers if the account will be paid in full within the first 10 d
Usually, the date of invoice is excluded in the counting of the number of days.
Ÿ n/30 means if the buyer does not pay the (full) invoice amount within the first cash discount term to qualify fo
amount is due within 30 days after the sales invoice date.
Ÿ 2/EOM means a buyer who pays by the end of the month of purchase may deduct a 2% discount from the inv

Ÿ 2/10/EOM means a buyer who pays by the 10th of the month following the month of purchase may deduct a
price.
b. Cash discounts are recorded in accounting books of both the buyer and the seller.
Ÿ The buyers use the account PURCHASE DISCOUNT.
Ÿ The sellers use the account SALES DISCOUNT.
c.
Cash discounts are granted after the purchase or sale transaction but during the full payment of accounting within

. TWO METHODS OF RECORDING PURCHASES

a. The two methods of recording purchases are the GROSS METHOD and the NET METHOD.
b. GROSS METHOD:
Ÿ This commonly used in practice because it is more convenient from a bookkeping standpoint.
Ÿ It technically violates the MATCHING PRINCIPLE particularly if date of payment will happen during the
not during the accounting period when purchased are actually made.
Ÿ The Purchases or Inventory account and the Accounts Payable account are recorded at gross amoun
any.
Ÿ
If payment will be made within the discount period, the amount of cash discount is credited to Purchas
is a contra account to Purchases account in the Income Statement under the Cost of Sales section.
c. NET METHOD
Ÿ This is theoretically correct because the net amount represents the cash equivalent on the date of payment bu
commonly used in practice.
Ÿ The Purchases or Inventory account and the Accounts Payable account are recorded at net amount
trade discount, if any.
Ÿ
If payment will be made beyond the discount period, the amount of cash discount is debited to Purchas
(or Other Expense Account) which is included among the Operating Expenses in the Income Statement.
Ÿ
At the end of the accounting period in which the account is not yet paid but the end of the accounting period
discount period, the amount of cash discount is debited to Purchase Discount Lost account (or Other E
account Accounts Payable of the same amount is credited. The purpose of which is to report the appro
statements at reporting date.

. INVENTORY ACQUISITION AT A LUMP-SUM PRICE

a.
Inventories acquired at a single price or basket price (also called lump-sum price) must be allocated or ap
inventory items based on their respective sales price. This is called the RELATIVE SALES PRICE METHOD.
b. The relative sales price refers to fair market values of each item of inventoy.
c. The allocation procedures are as follows:
c1.
Compute the total relative sales price of each inventory item by multiplying its quantity or number of units to
c2. Compute the grand total of all total relative sales price of each inventory item.
c3. Determine the fraction of each inventory item by making its total relative sales price as numerator while the g
denominator.
c4. Check if the total of all fractions is equal to 1.
c5. Compute the apportioned or allocated lump-sum price by multiplying each fraction by the lump-sum price.
c6. Check if the total allocated lump-sum price is equal to given lump-sum price.

E. TWO ACCOUNTING SYSTEMS FOR INVENTORIES

The two accounting systems for inventories are periodic system and perpetual system.

. PERIODIC SYSTEM
a. This is commonly used when individual inventory items have small peso amount and/or the inventory items are vo
Stock Keeping Units (SKUs) like groceries, pharmacy, hardware and autoparts.
b. The accounts used by this system are the following:
Ÿ Purchases Expense account
Ÿ Purchases Returns Contra- expense account
Under perpetual system, these
Ÿ Purchase Allowances Contra- expense account
accounts are not used. Instead, t
Ÿ Purchase Discount Contra- expense account
INVENTORY account is used.
Ÿ Freight-in Adjunct expense account

Ÿ Merchandise Inventory, beginning (based on count last year)

Ÿ Merchandise Inventory, ending (based on count this year) - Asset account

c. During purchases, the Purchases account is debited at cost of purchase which can be net of trade discount, if any.
or net amount depending on the method used if gross method or net method.
d. The cost of bringing the products or goods to its location is debited to Freight-in account. Thus, resulting to increa
(purchase price + freight-in).
e. Any return of previously purchased goods due to major defects or inferior quality is credited to Purchase Returns a
purchase will decrease (Purchase price + freight-in - Purchase Returns).
f.
Any reduction in cost of purchase due to minor defects but does not require the physical return of goods to seller i
Allowance account. In effectm the cost of purchase will decrease (Purchase price + freight-in - Purchase Returns -
g.
Any cash discount availed during payment of accounts within the discount period is credited to Purchase Discount.
purchase will decrease (Purchase price + freight-in - Purchase Returns - Purchase Allowances - Purchase Discount)

h. Based on the above discussion, the Cost of Purchases is computed as follows:

Purchases xxx
Less: Purchase Returns xxx
Purchase Allowances xxx
Purchase Discount xxx xxx
Net Purchases xxx
Add: Freight-in xxx
Total or Net cost of purchases xxx

i. If there are unsold goods last accounting period which is reported using the account Merchandise Inventory, begin
accounting period, the TOTAL COST OF GOODS AVAILABLE FOR SALE is computed by adding the Merchandise
the current year's total cost of purchases.
John John:
Merchandise Inventory beginning xxx
this came from
Purchases xxx
Inventory, ending of
Less:
last year. Purchase Returns
xxx
Purchase Allowances xxx
Purchase Discount xxx xxx
Net Purchases xxx
Add: Freight-in xxx
Total cost of purchases xxx
Total cost of goods available for sale xxx

j.
The unsold goods at the end of every accounting period to be reported using the account Merchandise Inventor
by physical counting of goods on hand at the end of the accounting period. The quantity is then multi
unit cost of each product to determine the total cost of Merchandise Inventory at the end of the accounti

k. The COST OF GOODS SOLD which is the same as the COST OF SALES is computed by deducting the Merchand
the TOTAL COST OF GOODS AVAILABLE FOR SALE.

Merchandise Inventory, beginning xxx

Purchases xxx
Less: Purchase Returns xxx
Purchase Allowances xxx
Purchase Discount xxx xxx
Net Purchases xxx
Add: Freight-in xxx
Total cost of purchases xxx
Total cost of goods available for sale xxx
 Less: Merchandise Inventory, ending(per count) xxx
Cost of Goods Sold/Cost of Sales xxx

. PERPETUAL SYSTEM
a. This is commonly used when individual inventory items have relatively large peso amount and/or the inventory item
few in terms of Stock Keeping Units (SKUs) like cars and jewelry.
b. It requires the maintenance of Inventory Stock Card for each item of inventory in which the movement of qua
together with its related total cost.

Inventory Item: Product ABC

Inventory Code: 14344

Date Transactions Ref. Received Issued Balances

Purchases CO Sales
2020
1-Jan Purchases RR 0520 xxx xxx
2-Jan Purchase Returns CM No. 1 (xxx) xxx
2-Jan Sales SI 1980 xxx xxx
3-Jan Sales Returns RR 0528 (xxx) xxx Ending Inventory

NOTES:
Ÿ The transactions recorded under the RECEIVED COLUMN are the purchases from suppliers supported by Rece
Receiving Department, and Purchase Returns to suppliers. Purchase returns are in negative figure because the
purchases.
Ÿ The transactions recorded under the ISSUED COLUMN are the sales to customers supported by Sales Invoice
Department, and Sales Returns from customers which are supported by Receiving Reports (RR) from the Rece
returns are in negative figure because these are reductions in total sales.

Ÿ Sales allowances and sales discounts are not reported in the Inventory Stock Cards because these do n
movement of inventories but will only affect the amount or balances.
Ÿ Only purchase returns and allowances are reported in the Inventory Stock Cards because these transacti
movement of inventories.

b. The accounts used by this system are the following:

Ÿ Inventory or Merchandise Inventory without any indication if beginning or ending inventory.
Ÿ This is an ASSET ACCOUNT; normal balance is DEBIT.
Ÿ This account is a CONTROL or GENERAL LEDGER ACCOUNT
Ÿ Its subsidiary ledgers are the INVENTORY STOCK CARDS
Ÿ Always, the GL account Balance (Inventory) should be equal to the total of the Subsidiary Ledger Balanc
= SL]

F. MEASUREMENT OF INVENTORY
Philippine Accounting Standards No. 2, paragraph 9, provides that "Inventories shall be measured at the LOWER OF C
REALIZABLE VALUE." This is called LCNRV.

G. THE "COST" OF ENDING INVENTORY

(COST FLOW ASSUMPTIONS/COST FLOW METHODS/COST FORMULA)
. The Acceptable Costing Method
In accordance with PAS No. 2, there are three acceptable costing methods, namely: First-in, First-out Method (FIFO),
and the Specific Identification Method.

PAS Reference
Aceptable Cost Flow Method PAS No. Paragraph Concepts
a. First-in, First Out (FIFO) Method 2 25 The goods first purchased are first sold
(Periodic and Perpetual) The recent purchases or production remain in the
ending inventory
b. Weighted Average Method 2 25 The total GAFS in pesos divide by total GAFS in
Average Costing

(PERIODIC AVERAGE COSTING) units equals weighted average unit cost.

Notes: The weighted average unit cost times number of
Method

units sold equals Cost of Goods Sold.

Under perpetual average costing, use sold x WAUC)
the MOVING AVERAGE METHOD
Average Costing
Method
Under perpetual average costing, use
the MOVING AVERAGE METHOD The weighted average unit cost times number of
units on hand (unsold) equals ending inventory.
(Unsold units x WAUC)
c. Specific Identification Method 2 23 Applicable to inventory items that are not ordinar
interchangable, and to inventories that segregate
for specific products

The number of sold units per invoice times their

respective unit cost is the Cost of Sales.
The number of unsold units or on hand per count
times their respective unit cost is the ending
inventory,

. No Longer Acceptable Method

PAS No. 2 does not permit anymore the use of the LAST-IN, FIRST OUT method (LIFO) as an alternative formula
inventories at reporting date because of the following reasons:
a. It is not in accordance with matching principle because:
Ÿ The goods last purchased are first sold. This is not the normal flow of inventories in actual practice.
Ÿ
The oldest purchases or production remain in the ending inventory. This is not also the normal flow of inv
b.
The normal trend is cost of purchase is increasing. Therefore, the cost of ending inventory is LOWER because this
with lower cost of purchase. In effect, the lower the ending inventory is the lower the net income and th
this is one of the ways to prepare fraudulent financial statements to pay lower taxes.

. THE FIRST-IN, FIRST-OUT METHOD (FIFO)

a. The characteristics of FIFO method are as follows:
Ÿ It is supported as a logical and realistic approach to the flow of costs, especially if it is impractical
method.
Ÿ It assumes a cost flow closely paralleling the usual physical flow of goods sold.
Ÿ Revenue is charged with cost considered applicable to the goods actually sold.
Ÿ Ending inventories are reported in terms of most recent cost that are closely approximating the current v
date of the statement of financial position.
Ÿ It affords a little opportunity for profit manipulation because the assignment of costs is determined by t
incurred.

b. The prices of goods or products are increasing as time passes by. The effect of increasing prices are the followi

Ÿ The cost of inventory at the end of the reporting period is higher because these inventory items came
higher cost that the first or older purchases. The higher the ending inventory, the higher the net incom
using FIFO because in the period of inflation, this method will result to the highest net income.

Ÿ
The cost of sales is lower because the items of inventory included here came from previous or older purcha
lower the cost of sales, the higher the net income. This is the objection in using FIFO because goods
prices that results to improper matching of cost against revenue.
Direct
Ending Inventory Net Income relations
Overstated/Higher Overstated/Higher hip
Understated/Lower Understated/Lower
Inverse
Cost of Sales Net Income relations
Overstated/Higher Understated/Lower hip
Understated/Lower Overstated/Higher

c. FIFO - PERPETUAL
Ÿ This requires the use of STOCK CARD showing the quantity, unit cost, total cost for each major columns for R
RUNNING BALANCES.
Ÿ The running balances consists of layers in which the first layer (on top) is the earliest cost followed by anothe
ealiest cost.
Ÿ The first to be issued (sold) will come from the first layer then followed by the next layer.
Ÿ The total of all layers under the running balance column at the end of the reporting period represents the end
quantity and in peso amount.
 d. FIFO - PERIODIC
Ÿ This does not require the use of stock cards.
Ÿ
At the end of the reporting period, the quantity of inventory ending can be determined by physical counting. T
will be assigned costs based first on most recent purchase, then to the next most recent purchase until the to
already assigned values. The total of those values will be the inventory at the end of the accounting period.

e. Comparing Ending Inventory for both FIFO-Perpetual and FIFO-Periodic

The inventory at the end of the accounting period for both FIFO-perpetual and FIFO-periodic are the
Sales. - both in quantity and amount.

. THE WEIGHTED AVERAGE METHOD (FIFO)

a. It is based on the assumption that goods should be charged at an average cost which is being influenced or weigh
purchased at each price.

b. WEIGHTED AVERAGE - PERIODIC

Ÿ
The WEIGHTED AVERAGE UNIT COST is computed by dividing the total purchases by the total number of unit
Ÿ Inventories are stated at the same weighted average cost per unit. This is equal to quantity or units on hand (
average cost per unit.
Ÿ Cost of sales are also stated at the same weighted average cost per unit. This is equal to quantity or units sold
cost per unit.

c. WEIGHTED AVERAGE - PERPETUAL

Ÿ This requires the use of STOCK CARD showing the quantity, unit cost, total cost for each major columns for R
RUNNING BALANCES.
Ÿ This weighted average method is called the MOVING AVERAGE METHOD because the weighted average un
there are purchases.
Ÿ
The new moving average is computed by dividing the new total cost (previous running balance in pesos + new
new total quantities (previous running balance in units + new purchases in units).
Ÿ
The new weighted average unit cost is used in determining the total cost of issued quantity under the ISSUED

. Comparing the FIFO METHOD and the WEIGHTED AVERAGE METHOD

a. The cost of inventory at the end of the accounting period under FIFO method is usually higher than the
(either periodic or perpetual) because the costs of ending inventory using the FIFO method come from most recen
higher due to inflation.
b. The cost of sales at the end of the accounting period under FIFO method is usually lower than the weigh
(either periodic or perpetual) because the costs of unsold goods using the FIFO method come from earliest prices
most recent prices because of inflation.

. THE SPECIFIC IDENTIFICATION METHOD

a.
The specifc identification method requires a means of identifying the historical cost of each unit of inventory up to
b. In periodic inventory system, cost allocation to ending inventory and cost of sales is based on the identified cost of
the accounting period.
c. In both periodic and perpetual systems, the flow of recorded costs matches the physical flow of goods.
d. The specific identification procedure is a highly objectiveapproach to matching historical costs with revenues.
e. An argument regarding this method is the practical determination of inventory cost because its appli

Ÿ If inventory is composed of many items or identical items acquired at different time and at different prices, co
are likely to be slow, burdensome, and costly.
Ÿ When units are identical or interchangable, specific identification method may give an opportunity to
selecting the particular units for delivery to customers.
Ÿ
Significant changes in costs during a period may warrant changes to revenues on a basis other than past iden

H. EFFECT OF INVENTORY ERROR

IN INVENTORY ERROR ANALYSIS, ALWAYS CHECK TWO THINGS:
 . Ending inventory balance (include or exclude the items)
a. adjusting entry will depend if the entity is using the perpetual or periodic inventory system.

b. Periodic system (if the problem is silent, assume this inventory system):

The book is still open (apply if problem is silent) The book is already clos

b1. If ending inventory is understated:

Inventory, ending (asset) xxx Inventory, ending (asset)
Income Summary (temporary) xxx Retained Earnings

b2. If ending inventory is overstated:

Income Summary xxx Retained Earnings
Inventory, ending (asset) xxx Inventory, ending (asset)

c. Perpetual system:
b1. If ending inventory is understated:
Inventory (asset) xxx Inventory (asset)
Cost of Sales (expense) xxx Retained Earnings

b2. If ending inventory is overstated:

Cost of Sales (expense) xxx Retained Earnings
Inventory (asset) xxx Inventory (asset)

POSSIBLE ERRORS IN ENDING INVENTORIES: Effect in ending inv.

. Not all unsold items are included in ending inventories Understated
about physical invty. (qty.)

a. goods on consignment - consignor

b. goods in transit - depend on the shipping term
c. Unrecorded purchases, and excluded in inventory
. Included in ending inventories are not ours Overstated
a. goods on consignment - consignee
b. goods in transit - depend on the shipping term
c.
recorded purchases which should not be recorded
but included the items in ending inventory
. Mathematical errors:
amount

a. Error in computation like extension (qty x unit cost) understated or overstated

b. Error in addition vertically (footing) or subtraction understated or overstated

NOTES
. Purchases/AP - increase (determine the date of recording)
Inventory, ending - increase (if items are correctly included or excluded)

. Sales/AR - increase (determine the date of recording)

Inventory, ending - decrease (if items are correctly included or excluded)

. Recording of Purchases/AP (if buyer) and Sales/AR (if seller)

TIPS:
A. Identify first if you are the buyer or the seller
B. Identify the shipping term to determine who is the owner of the goods purchased or sold.
a. If you are the buyer, analyze the shipping term based on your point of view as buyer.
b. If you are the seller, analyze the shipping term based on your point of view as seller.
c. If the term is FOB shipping point, determine the date of shipment. If date of shipment is not
given, determine the date of receipt of goods (destination arrival date)
c1. If the problem is silent, the date of invoice is the date of shipment
d. If the term is FOB destination, determine the date of receipt or the date of arrival to the
destination.
C. Identify if the purchases or sales is recorded AND WHEN RECORDED (consider the cut-off
which is the end of the accounting period)
 Identify if the purchases or sales is recorded AND WHEN RECORDED (consider the cut-off
which is the end of the accounting period)
a. As seller, if the problem is silent, the date of recording of sales transaction is the date of the invoice.
b. As buyer, if the problem is silent, the date of recording of purchase transaction is the date of
receipt of supplier's invoice.
D. Identify when the item is included in inventory ending (GO BACK TO NO.)
Possible errors in ending inventory (1C AND 2C)
E. If the problem is silent, always assume that purchases are on credit while sales are also on credit basis.

I. MEASUREMENT OF INVENTORY
Philippine Accounting Standards No. 2, paragraph 9, provides that "Inventories shall be measured at the LOWER OF
REALIZABLE VALUE." This is called LCNRV.

J. THE "NET REALIZABLE VALUE" OF ENDING INVENTORY UNDER LCNRV

. The Net Realizable Value (NRV) is the estimated selling price (ESP) in the ordinary course of business less the
and the estimated cost necessary to make the sale (OR cost to sell ot cost to dispose).
. There are inventories that are damaged, wholly or partially obsolete, or their selling prices are declined. These costs of
recoverable. In effect, SELLING PRICE WILL DECREASE.
. The same thing if the cost to complete or to sell these inventories has increased. These costs may not also be recovera
INVENTORIES WILL INCREASE.
. ASSETS LIKE INVENTORIES SHALL NOT BE CARRIED (BOOK VALUE OR CARRYING AMOUNT) IN EXCESS OF
REALIZED FROM THEIR SALE OR USE (SELLING PRICE).

. In order not to violate number (4) above, inventories are written down to NET REALIZABLE VALUE which is computed a

Estimated selling price (Realizable value at gross) xxx

Less: Estimated cost to sell (ex. Commission, advertising) xxx
Estimated cost of completion (if applicable) xxx xxx
Net Realizable Value xxx

I. WHICH TO APPLY - COST OR NRV?

. Philippine Accounting Standards No. 2, paragraph 9, provides that "Inventories shall be measured at the LOWER OF CO
VALUE."
. It means whichever is LOWER.

. Bases to determine whichever is lower:

a. Item by item or individual basis
Ÿ The commonly used basis in determining LCNRV.
Ÿ Inventory item costs = Unit cost of each inventory item x units on hand
Ÿ Inventory item NRV = Unit NRV of each inventory item x units on hand
Ÿ Select the lower one between cost and NRV of each item
Ÿ The total of the selected amount is the total cost of Inventory at the end of the reporting period.

b. Inventory classification basis

Ÿ This is not appropriate to apply in writing down inventories to LCNRV.
Ÿ Examples of classification are as follows:
ü Materials inventory, work in process and finished goods inventory
ü Inventory based on geographical location

J. TWO ACCOUNTING METHODS FOR INVENTORY WRITEDOWN

. These two accounting methods are the DIRECT METHOD and the ALLOWANCE METHOD.

. DIRECT METHOD
a. If the NRV is the lower amount, the difference between cost and NRV is charged to Cost of Sales (under perpetual
Summary account (under periodic inventory system)

Ÿ Pro-forma Journal Entry (Periodic System):

Inventory, ending (at NRV) xxx
Income Summary (at NRV) xxx
Setting up of ending inventory.
 Ÿ Pro-forma Journal Entry (Perpetual System):
Cost of Sales (difference) xxx
Inventory (difference) xxx
Recoding inventory at NRV

b. If the cost is the lower amount, no adjusting journal entry is necessary.

Ÿ Under perpetual system, the recorded inventory is already at cost.
Ÿ Under periodic system, the amount to be recorded as ending inventory is also at cost/

. ALLOWANCE METHOD (LOSS METHOD)

a. The most preferred method because the effects of write down and reversal of writedown are clearly identified in th
comprehensive income udner the cost of sales section.

b. If the NRV is the lower amount, the difference between cost and NRV is charged or debited to LOSS ON INVENTOR
to ALLOWANCE FOR INVENTORY WRITEDOWN.

Ÿ Pro-forma Journal Entry (Periodic System):

Inventory, ending (at cost) xxx
Income Summary (at cost) xxx
Setting up of ending inventory.

Loss on Inventory writedown xxx

Allowance for Inventory Writedown xxx
Recording inventory at NRV

Ÿ Pro-forma Journal Entry (Perpetual System):

Loss on Inventory writedown xxx
Allowance for Inventory Writedown xxx
Recording inventory at NRV

c. The Loss on Inventory Writedown account is reported in the Statement of Comprehensive Income.
computation of cost of good sold using the the allowance method.

Inventory, beginning xxx

Add: Net Purchasees xxx
Goods available for sale xxx
Less: Inventory, ending xxx
Cost of sales before inventory writedown xxx Expense - Debit balance
Add: Loss on Inventory write-down xxx Expense - Debit balance
Cost of sales after inventory writedown xxx

d. The Allowance for Inventory Writedown account is

Ÿ reported as a contra asset account or as a deduction from Inventory account balance reported at cost.

Current Assets:
Inventory xxx
Less: Allowance for Inventory Writedown xxx xxx

Ÿ
adjusted upward or downwards in subsequent years depending on the diffence between costs and net realizab

ü Pro-forma Journal Entry (UPWARD/PERIODIC):

Loss on Inventory writedown xxx
Allowance for Inventory Writedown xxx
Recoding inventory at NRV

NOTES:
The Loss on inventory writedown account is presented as an addition to the cost of sales se
comprehensive income.

Pro-forma Journal Entry (UPWARD/PERPETUAL):

Cost of Sales (difference) xxx
 Allowance for Inventory Writedown xxx
Recoding inventory at NRV

ü Pro-forma Journal Entry (DOWNWARS/PERIODIC):

Allowance for Inventory Writedown xxx
Gain on reversal iof inventory writedown xxx
Decrease in allowance provision.

Pro-forma Journal Entry (DOWNWARS/PERPETUAL):

Allowance for Inventory Writedown xxx
Gain on reversal iof inventory writedown xxx
Decrease in allowance provision.

NOTES:
The amount credited to Gain on reversal of inventory writedown account is up to the extent only of the
Inventory Writedown account.

The Gain on reversal of inventory writedown is presented as a deduction from the cost of sale
comprehensive income.

Inventory, beginning xxx

Add: Net Purchasees xxx
Goods available for sale xxx
Less: Inventory, ending xxx
Cost of sales before inventory recovery xxx Expense - Debit balance
Less: Gain in reversal of inventory writedown xxx Income/Gain - Credit balance
Cost of sales after inventory recovery xxx

K. OTHER COSTING PROCEDURES

There are other costing procedures applied in practice specifically for manufacturing operations. This includes standard costi
All these topics will be discussed on detail in other accounting courses.

. Standard Costs
a. These are predetermined costs based upon representative or normal conditions of efficiency and volume of operati
b. Standard costs are determined for materials (both in quantity and prices), labor costs (both in number of hours and
overhead (both in units and prices).
c. The difference between the actual cost and the standard cost is called standard cost variance which can be favo
in terms of operational and cost experience.
d. Examples of unfavorable variances are excessive materials usage, inefficient labor application, excessive spoilage,
summarized in variance accounts.
e. Standard costs are developed by:
Ÿ analyzing carefully past manufacturing experiences
Ÿ time and motion studies
Ÿ job and process studies
Ÿ consulting data from industry and economy wide sources
f. Standards are subject to review at frequent interval which may or may not result to its adjustments or not.
g. Review of standards is necessary to that at statement of financial position date, standard costs will reasonably app
under one of the RECOGNIZED COSTING METHOD.S

. Direct Costing
a. Also known as variable costing or marginal costing.
b. Inventories under this costing procedure incllude only the variable costs incurred in production like material cost, la
overhead.
c.
Fixed costs under this method are treated as period costs or operating expenses, therefore, deducted from current
that are a function of time and that are continuing regardless of the volume (quantity) of outputs like indirect labor
salary), depreciation of factory PPEs, and property tax.
d. In summary, only costs directly related to output (products or goods produced) are assigned as its cost as inventor
cost of sales when sold.
e. It provides more meaningful and useful data to management than full costing method.
f. It enables management to appraise effects of sales fluctuations on net income or profit.
 g.
It becomes a valuable tool for planning and control and is used by management to analyze cost, price, and volume
h. It is not generally acceptable for general purpose financial statements presentation or for external reporting.

L. PURCHASE COMMITMENTS
. Commitments are frequently made for the future purchase of goods at fixed prices and at fixed quantity
. The seller of goods is obliged to deliver the agreed quantity to buyer at agreed price.
. The buyer, on the other hand, is obliged to pay the seller of the agreed price.
. This commitment must be noncancellable to recognize expected future losses on the part of the buyer because of po
purchase price of goods to be received.
. The difference between the agreed price (fixed price) and the future purchase price (if there is a decline) is charged or
PURCHASE COMMITMENT which is reported in the Statement of Comprehensive Income under Other Expenses. The
account is credited.

Pro-forma Journal Entry

Loss on Purchase Commitment xxx
Estimated Liability for Purchase Commitment* xxx

*May also use the account Estimated Loss on Purchase Commitments. This account is reported in the
position under current liability. The loss is also assigned to the period in which the decline took place

. Current LOSS ON PURCHASE COMMITMENT would not be recognized or appropriate under the following cond
a. When commitments can be cancelled.
b. When commitments provide for price adjustments
c.
When hedging transactions prevent losses. Hedging transaction means purchases or sales entered into for the purp
respectively, sales or purchases already made or under contract, in order to offset the effects of price fluctuations.
d. When decline do not suggest reductions in sales prices.

.
Acquisition or delivery of goods in the future requires recognition of Accounts Payable for the full amount of fixed or ag
debit to Estimated Liability for Purchase Commitment and Purchases account for the difference (squeeze figure).

Pro-forma Journal Entry

Estimated Liability for Purchase Commitment xxx
Purchases (at market price on delivery date) xxx
Accounts Payable (at fixed or agreed price) xxx

. If at the end of the reporting period, there is further decline in purchase price, addition loss is to be recognized.

Pro-forma Journal Entry

Loss on Purchase Commitment xxx
Estimated Liability for Purchase Commitment* xxx

.
If at the time of delivery, the purchase price increases and exceed the fixed price (agreed price), the increase is recogn
COMMITMENT which shall be offset to the extent of amount of LOSS ON PURCHASE COMMITMENT PREVIOUSLY RECO

Pro-forma Journal Entry

Estimated Liability for Purchase Commitment xxx
Purchases (at market price on delivery date)) xxx
Accounts Payable (at fixed or agreed price) xxx
Gain on Purchase Commitment* xxx

*The account Gain on Purchase Commitment is reported under Other Income section of the Statement of Compreh

M. AGRICULTURAL FOREST AND MINERAL PRODUCTS

. PAS 2, paragraph 4, provides inventories of agricultural, forest and mineral products are measured at NET REALIZABLE
OF PRODUCTION.
.
This occurs when agricultural crops have been haarvested or mineral productshave been extracted and a sale is assured
guarantee, or when a homogenous market exists and there is a negligible risk of failure to sell.
 This occurs when agricultural crops have been haarvested or mineral productshave been extracted and a sale is assured
guarantee, or when a homogenous market exists and there is a negligible risk of failure to sell.

. Examples of agricultural products are as follows:

Biological Assets Agricultural produce
a. Sheep Fleece
b. Coconut Trees Coconut
c. Dairy cattle Milk
d. Shrubs Leaves
e. Vine Grapes
f. Chicken, Ducks Eggs

. Examples of forest products are firewood and lumber.

. Examples of mineral products are limestone, clay, sand, and gravel.

N. COMMODITIES OF BROKER-TRADERS
. Broker-traders are those who buy and sell commodities for otehrs or on their own account.
. PAS 2, paragraph 3, provides that commodities of broker-traders are measured at FAIR VALUE LESS COST TO SELL.
. FAIR VALUE is the amount for which an asset could be exchanged, or a liability settled, between knowledgable and will
transactions.

O. ESTIMATING INVENTORY AT REPORTING DATE

. Performing physical counting of inventory, although possible, but sometimes may prove costly, difficult and inconve
point in time. In this regard, it is necessary to approximate the value of these inventory items for financial repor

. Possible application of estimating inventory:

a. Time constraint to physically count inventory on hand to meet the deadline of the issuance of financial state

b. Submission of estimated cost of inventory damaged by fire, due to theft/missing, or other catastrophe

Example: Inventory shortage/missing (Application is Exercise 2.3-9C)

Estimated ending inventory, per record, unad. (to be accounted for) xxx represents inventory it
Less: Goods out on consignment xxx
not in the location of th
Goods in transit (recorded already as purchases) xxx xxx
Estimated ending inventory, per record, adj. (to be accounted for) xxx represents inventory it
Less: Ending inventory per count (as accounted for) - what is left xxx represents inventory it
Inventory shortage/lost/missing xxx

Example: Fire Loss (Application is Exercise 2.3-9D)

Estimated ending inventory, per record (to be accounted for) xxx represents items on ha
Less: Inventories not damaged by fire (at LCNRV), PHYSICAL COUNT
xxx
Inventories not in the Place where fire occurred (at L xxx xxx like goods out on cons
EXPENSE FIRE LOSS, unadjusted xxx this represents invento
Less:Proceeds from sale of scrap materials xxx
INCOME
Proceeds from sale of partially damaged inventory by fi xxx xxx This represents recove
FIRE LOSS, ADJUSTED xxx

c. Preparation of interim financial statements in which the physical counting of unsold inventory is not necessary.

. The common methods of inventory estimation that are widely accepted in accounting are as follows:
a. Gross profit method (interim FS, insurance claim)
b. Retail inventory method (retail industry)

. Computation of NET SALES using the Gross Profit Method and the RETAIL INVENTORY METHOD
a. The computation of Net Sales using the gross profit method ignores the SALES ALLOWANCES and SALES DIS
accounts do not reflect any increase or decrease in physical inventory.
b. Unlike sales returns, the physical goods increase.

c. The formula to be used is the COST OF SALES (under periodic inventory system)

Inventory, beginning xxx Inventory, beginning - physical cou

 Purchases (gross) xxx Purchases (gross) - Supplier's invo
Purchase Discounts (xxx) Purchase Discounts - Supplier's CM
Purchase returns (xxx) Purchase returns - Supplier's CM
Purchase allowances (xxx) Purchase allowances - Supplier's C
Freight-in xxx Freight-in - Supplier's service invoi
Goods available for sale xxx Goods available for sale - per recor
Less: Inventory, ending ? Less: Cost sales (compute using SAL
Cost of Sales xxx Inventory, ending, per record, at co

GROSS PROFIT GP based on Sales Cost of Sales = Sales/Net Sales x Cost Ratio which is
METHOD GP based on Cost Cost of Sales = Sales/Net Sales divide by Sales Ratio o

. GROSS PROFIT METHOD

a. The assumption on this method is that gross profit rate remains approximately the same every accounting period,
consistent ratio of cost of sales to net sales.
b. It is called the gross profit method because the COST OF SALES is computed through the use of GROSS PROFIT R
c. The two bases in computing the cost of sales are as follows:
c1. BASED ON SALES
Ÿ Sales or Net Sales amount as the base is equal to 100%.
Ÿ Therefore, cost of sales is a certain % of Sales or Net sales.
Ÿ Cost of Sales = Sales/Net Sales x Cost Ratio which is lower than 100%.
Ÿ The Cost Ratio is the difference between 100% (Sales/Netsales) and Gross Profit Ratio

Step
Given Sales/Net Sales 50,000 100%
Cost of Sales ? ?
Gross Profit 30,000 60%

1 Compute the cost ratio

Sales/Net Sales 50,000 100%
Cost of Sales ? 40% (100% - 60% = 40%)
Gross Profit 30,000 60%

2 Compute the cost of sales amount

Sales/Net Sales 50,000 100%
Cost of Sales 20,000 40% (P 50,000 x 40%)
Gross Profit 30,000 60%

3 Compute the Inventory, ending

Goods available for sale 45,000 assumption/given
Cost of sales -20,000 from step 2
Inventory, ending 25,000 (P 45,000 - P 20,000)

c2 BASED ON COST
Ÿ The Cost of Sales amount as the base is equal to 100%.
Ÿ Therefore, Sales ratio is the sum of cost rate of 100% + Gross profit rate.
Ÿ Cost of Sales = Sales/Net Sales divide by Sales Ratio.

Step
Given Sales/Net Sales 90,000 ?
Cost of Sales ? 100%
Gross Profit ? 60%

1 Compute the sales ratio

Sales/Net Sales 90,000 160% (100% + 60% =160%)
Cost of Sales ? 100%
Gross Profit ? 60%

2 Compute the cost of sales amount

Sales/Net Sales 90,000 160%
 Cost of Sales 56,250 100% (P 90,000 / 160%)
Gross Profit 45,000 60%

3 Compute the Gross Profit amount

Sales/Net Sales 90,000 160%
Cost of Sales 56,250 100%
Gross Profit 33,750 60% (P 90,000 - P 56,250 = P 33,750)

4 Compute the Inventory, ending

Goods available for sale 75,000 assumption/given
Cost of sales -56,250 from step 3
Inventory, ending 18,750 (P 75,000 - P 56,250)

P. RETAIL INVENTORY METHOD

PAS 2 provides that this method is often used in the retail industry for measuring inventory of large number of rapidly
margin (gross profit or gross profit rate) for which it is impracticable to use other costing method.

Notes: At retail means at selling price.

Estimated ending inventory at cost is computed using the selling price or retail price of:
a. Beginning inventory
b. Purchases
Cost of sales
c. Goods available for sale
d. Goods sold

IN SHORT: At costat SP or at retail

ok Beginning inventory xxx xxx at selling price -100%
ok Add: Purchases xxx xxx at selling price - 100%
Mark-up xxx
Markdown (xxx)
Goods available for sale (final) xxx xxx includes mark-up and markdown
ok Less: Goods sold (sales) (qty x Unit SP) xxx at selling price - at 100%
ok Ending inventory (qty x Unit SP) xxx at selling price

Ending inventory at cost:

EI at retail x cost rate xxx

Cost rate = GAFS at cost/GAFS at retail

The higher the cost rate, the higher the EI at cost
The lower the cost rate, the lower the EI at cost

It is dfficult for them to keep track of unit cost a

all times.

Example: Sales
Cost Rate Cost Retail
Product A 62.50% 50 80
Product B 63.83% 30 47

Beg. Inv. 62.50% 50,000 80,000

Purchases 1 62.50% 20,000 32,000
Purchases 2 62.50% 25,000 40,000
Purchase Re 62.50% 5,000 8,000

33
Examples:
a. departments stores Unadj
b. supermarkets sales 52.80 100.00%
c. convenience stores like 7/11, Ministop, AlfaMart cos 33.00 62.50%
gp 19.80 37.50%
Information required:
a. Price at cost and at retail for
These involve a1. Beginning inventory
GOODS
AVAILAB
LE FOR
SALE
These involve
a2. Purchases during the period GOODS
physical
AVAILAB
movement of a3. Purchase returns
LE FOR
inventory a4. Departmental transfer-in (add/debit)
SALE
items. a5. Departmental transfer-out (deduct/credit)

b. Adjustments to the original SALES price:

b1. Additional mark-up Notes: At retail means at selling price.
b2. Mark-up cancellation
b3. Markdown Notes: Mark-up means profit
b4. Markdown cancellation

c. Other adjustments
c1. departmental transfer
c1.1 Departmental transfer-in
c1.2 Departmental transfer-out
c2. Breakage
c3. Shrinkage
c4. Theft
c5. Damaged goods
c6. Employee discount

Accounting Treatment of certain items

Cost Retail
BEGINNING INVENTORY xxx xxx

PURCHASES xxx xxx

a. Purchase discount (xxx)
b. Purchase returns (xxx) (xxx)
c. Purchase allowance (xxx)
d. Freight-in xxx Only accounts with
physical inventory
e. Markup xxx
movements have
f. Markup cancellation (xxx)
retail prices.
g. Markdown (xxx)
h. Markdown cancellation xxx
i. departmental transfer-in (debit) xxx xxx
j. departmental transfer-out (credit) (xxx) (xxx)

GOODS AVAILABLE FOR SALE xxx xxx Basis to compute COST RATE afte
cost rate = GAFS at cost/GAFS at

Cost Retail
GOODS AVAILABLE FOR SALE xxx xxx
a. Normal shrinkage (xxx)
b. Normal shortage (xxx) These are absorbed
or included in the
c. Normal spoilage (xxx)
COST OF SALES
EXPENSES

d. Normal breakage (xxx)

e. Abnormal shrinkage (xxx) (xxx)

So as not to distort
f. Abnormal shortage (xxx) (xxx)
the COST RATIO;
g. Abnormal spoilage (xxx) (xxx)
Reported as a LOSS
h. Abnormal breakage (xxx) (xxx)

Cost Retail
SALES xxx of employee discount and not the reg
price)
a. Sales discount - These are ignored because these
b. Sales allowances - involve physical movement of inv
 c. Sales returns (xxx)
d. Sales returns and allowances (xxx)
e. Employee discounts xxx (The credit sale recorded is net of em
NET SALES xxx

Notes: At retail means at selling price.

SALES - at 100% xxx

a. Sales discount - WHAT IS THE GIVEN inclu
b. Sales allowances - Net Sales - less than 100%
c. Sales returns (xxx) Sales Discount
d. Sales returns and allowances (xxx) Sales Allowance
e. Employee discounts xxx Sales Return

a. Normal shrinkage xxx To present in the computa

b. Normal shortage xxx Net Sales - less than 100%
c. Normal spoilage xxx Sales Discount
d. Normal breakage xxx Sales Allowance
Sales - gross - at 100%
e. Abnormal shrinkage xxx
f. Abnormal shortage xxx
g. Abnormal spoilage xxx
h. Abnormal breakage xxx
NET SALES xxx

Items related to retail method

a. Initial mark-up - original mark-up on the cost of goods
b. Original retail price - the sales price at which the goods are first offered for sale.
c. Additional markup - increase in sales price above the original sales price
d. Markup cancellation - decrease in sales price that does not decrease the sales price below the original sales pri
e. Net markup - also called net additional markup; mark-up minus markup cancellation
f. Markdown - decrease in sales price below the original sales price.
g. Markdown cancellation - increase in sales price that does not decrease the sales price above the original sales pric
h. Net markdown - markdown minus markdown cancellation
i. Maintained markup - difference between the cost and sales price after adjustment for all of the above items
- also called "markon."

ILLUSTRATION:
Cost 100
Add: Initial markup (original mark-up) 50
Original retail or sales price (This is the boundary between MU & MD) 150
Add: Additional markup 10
New sales price 160
Less: Markup cancellation 3
New sales price (but not below the original sales price) 157 (while original sales price
(P 150 + P 7 Net mark-up

New sales price (but not below the original sales price) 157
Less: Markup cancellation (P 157 - P 150 original SP) 7
Markdown (P 150 original SP - P 145 new SP) 5
Total 12
New sales price 145
Add: Markdown cancellation 3
New sales price (but not above the original sales price) 148 (while original sales price
(P 150 - P 2 net markdow

New sales price (but not above the original sales price) 148
Less: Cost 100
Maintained markup or markon 48

Cost 100
Initial markup 50
Maintained

Additional Markup 10
Markup
ADD:
Maintained
Markup
ADD:
Markup cancellation (P 3 + P 7) (10)
Markdown (5)
Markdown cancellation 3 48
Adjusted sales price 148
Less: Cost 100
Maintained markup or markon 48

Approaches in the use of retail inventory method

. Conservative approach
- also called conventional approach, lower of cost or net realizable value approach
- the goods available for sale - AT RETAIL (GAFS) to be used in the computation of COST RATE, the GAFS is
because it under retail includes the following aside from beginning inventory and net purchases:
a. additional markup (+)
b. markup cancellation (-)
- the cost ratio is lower due to higher GAFS
(Cost ratio = GAFS at cost / GAFS at retail - higher)
- conservative.
EI at cost (lower) = EI at retail x cost rate (lower)

. Average cost approach

- the goods available for sale - AT RETAIL (GAFS) to be used in the computation of COST RATE is
under retail includes the following aside from beginning inventory and net purchases:
a. additional markup (+)
b. markup cancellation (-)
c. markdown (-)
d. markdown cancellation (+)
- the cost ratio is higher due to lower GAFS
(Cost Rate = GAFS at cost / GAFS at retail - lower)
- it will give higher ending inventory value at cost than conservative approach due to higher cost ratio.
EI at cost (higher) = EI at retail x cost rate (higher)

. FIFO approach
- there are two cost ratios to be computed, as follows:
a. Beginning inventory cost ratio
(Beginning inventory at cost / Beginning inventory at retail)
b. Net Purchases cost ratio
(Net Purchases at cost / Net Purchases at retail)
- the ending inventory will come from the net purchases
- the ending inventory value at cost will use the net purchases cost ratio
ess of production for such sale or in the form of materials

In the form of materials

or supplies to be
consumed in

production process

Materials Inventory
(Manufacturing)

ealizable Value (NRV). - IF PROBLEM IS SILENT

ng business, the materials and factory supplies of the

John John:
Purchase Tax John John:
This is your liability to BIR
VAT-REGISTERED BUSINESS
As buyer:
country's customs authorities. Purchases/Inventory (Purchase Price) 100,000
he entity is a NON-VAT REGISTERED BUSINESS but Input VAT (P 100,000 x 12%) 12,000
Cash

chase (Tax is not recoverable or irrevocable) As seller:

Cash 168,000
Output VAT (P 150,000 x 12%) John John:
Sales (100,000 cost +50,000 GP) P 12,000 - Input VAT
p 6,000 - Excess
 John John:
P 12,000 - Input VAT
p 6,000 - Excess
At month-end:
Output VAT 18,000
VAT Payable
Input VAT

lready been paid or contributed. VAT Payable 6,000

Cash
Purchases. (gross or net METHOD)

imported materials or merchandise inventories.

ng format of computation:

xxx
xxx
xxx
xxx
xxx
xxx
xxx Debit - Purchases or Inventory

xxx
Allowances xxx
xxx (xxx)
xxx

UFACTURING BUSINESS.

ed goods of a manufacturing business are the COST OF

Finished Goods
xxx
Prime Costs
xxx
xxx
xxx

that remains relatively contant regardless if the volume

ght-line method (SLM)

salaries are monthly basis)

eriod in which it is incurred.

tion that varies directly with the volume of production.

ent location and condition. These costs may include the

ventories that are produced from borrowing will take a

not required to capitalize this for inventories that are
st Expense)

y and finished goods inventory of a manufacturing

ion costs (due to inefficiency)

rior to a further production stage (unless essential to the

o their present location and condition.

tising expense, and freight-out or delivery costs to bring

entories invoiced in a foreign currency.

SS and consists primarily of the following costs:

ory personnel and other attributed overhead

s and general administrative personnel like salaries of

s are recognized as expenses in the period in which they

ancials statements purposes, the OWNERSHIP OF THE

nsider.
 he Inventory, ending of the seller and not of the seller.

d in the Inventory, ending of the buyer and not of the

of somewhere else between the location of the seller and

The passing of title to the goods happened upon its

books, and exclude the goods from its Inventory at the

o recognize Cost of Sales in its accounting books.
d other expenses from the point of shipment to the point

he passing of title to the goods will happen only upon its

yer is waiting for the goods.

ting books, but include the goods to its Inventory at

not also recognize Cost of Sales in its accounting books.

ces, must determine who has the legal title to the

e adjusting journal entries to correctly report the

s remain with the SELLER until the selling price is fully

m the inventory of the seller. This is an example of

s to another party with the arrangement of selling these

its location or place.

counting period unless these goods are already sold by

ost of goods consigned.

atements under the line item INVENTORY.
atements under the line item INVENTORY.

ocation or place.
counting period whether sold or not because there is

G INVENTORY

n the hands of the consignee.

ce is already received or not.

ce is already received. The related term is FOB Shipping

ce is already received. The related freight term is Freight

B Destination

G INVENTORY

e is already received. The related term is FOB

e is already received. The related freight term is Freight

OB Shipping Point.

mined the amount to be recorded as cost of purchase of

t price will be recorded as cost of purchase. In case

e at a time.
d in full within the first 10 days of receiving the invoice.

h discount term to qualify for the discount, then the net

a 2% discount from the invoice price.

of purchase may deduct a 2% discount from the invoice

yment of accounting within the discount period.

g standpoint.
ent will happen during the next accounting period and

ed at gross amount which is net of trade discount, if

nt is credited to Purchase Discount account which

of Sales section.

on the date of payment but this method is not

ed at net amount which is net cash discount and of

unt is debited to Purchase Discount Lost account

n the Income Statement.

d of the accounting period is already beyond the

Lost account (or Other Expense Account) and the
which is to report the appropriate amount in the financial

e) must be allocated or apportioned among such

SALES PRICE METHOD.

ntity or number of units to relative sales price per unit.

e as numerator while the grand total as the

by the lump-sum price.

the inventory items are voluminous or many in terms of

perpetual system, these
are not used. Instead, the
NTORY account is used.

et of trade discount, if any. The amount can be at gross

nt. Thus, resulting to increase in cost of purchase

dited to Purchase Returns account. In effect, the cost of

al return of goods to seller is credited to Purchase

ght-in - Purchase Returns - Purchase Allowances).

dited to Purchase Discount. In effect, the cost of

ances - Purchase Discount).

erchandise Inventory, beginning of the current

d by adding the Merchandise Inventory, beginning and

nt Merchandise Inventory, ending, is determined

he quantity is then multiplied by the respective
t the end of the accounting period.

by deducting the Merchandise Inventory, ending from

 UNSOLD
SOLD

nt and/or the inventory items are not so voluminous or

hich the movement of quantity on hand is reported

Invty. Stock Cards

Updated regularly
Basis to determine
inventory ending
Quantity
Unit Cost
Total Cost (Qty. x UC)

Ending Inventory 10 pcs @ P1,000 = P 10,000

uppliers supported by Receiving Report (RR) from the

negative figure because these are reductions in total

upported by Sales Invoice (SI) issued by the Sales

Reports (RR) from the Receiving Department. Sales

k Cards because these do not involve physical

rds because these transactions involve physcial

or ending inventory.

he Subsidiary Ledger Balances (Inventory Stock Cards). [GL

ured at the LOWER OF COST AND NET

, First-out Method (FIFO), Weighted Average Method,

User:
Concepts Related Accounts LIFO METHOD
This is no longer GAAP
ased are first sold Cost of Sales (Exp) sold Inventory, ending
based because this is a
or production remain in the Inventory, ending (Asset)
Cost of Sales way to FS misstatement.
unsold
os divide by total GAFS in
Periodic Inventory

ed average unit cost.

unit cost times number of Cost of Sales
System

st of Goods Sold. (Units

 Periodic Inventory
System
unit cost times number of Inventory, ending
d) equals ending inventory.
UC)
y items that are not ordinarily
o inventories that segregated

Cost of Sales
nits per invoice times their
the Cost of Sales.
units or on hand per count Inventory, ending
unit cost is the ending

O) as an alternative formula in determining cost of

n actual practice.

o the normal flow of inventories in actual practice.

ory is LOWER because this comes from oldest purchases

er the net income and the lower the tax. In short,

t is impractical to achieve specific cost identification

approximating the current value of inventories at the

of costs is determined by the order in which costs are

sing prices are the following using the FIFO method:

hese inventory items came from recent purchases with

the higher the net income. This is the advantage of
st net income.

om previous or older purchases with lower costs. The

using FIFO because goods are sold at earlier or older

r each major columns for RECEIVED, ISSUED and

est cost followed by another layer which is the next

g period represents the ending inventory, both in

ned by physical counting. Then, the quantity on hand
ecent purchase until the total quantity on hand have
of the accounting period.

riodic are the same. It is also the same for Cost of

s being influenced or weighted by the number of units

by the total number of units purchased.

quantity or units on hand (unsold) times the weighted

qual to quantity or units sold times the weighted average

r each major columns for RECEIVED, ISSUED and

se the weighted average unit cost will change everytime

ning balance in pesos + new purchases in pesos) by the

quantity under the ISSUED COLUMN.

usually higher than the weighted average method

hod come from most recent prices which are usually

ally lower than the weighted average method

come from earliest prices which are usually lower than

ach unit of inventory up to the time of sale.

sed on the identified cost of items in hand at the end of

l flow of goods.
l costs with revenues.
ry cost because its application is often difficult.

e and at different prices, cost identification procedures

y give an opportunity to profit manipulation by

a basis other than past identifiable costs.

 The book is already closed

ending (asset) xxx

xxx

xxx
ry, ending (asset) xxx

xxx
xxx

xxx
xxx
ate of the invoice.

o on credit basis.

ured at the LOWER OF COST AND NET

business less the estimated cost of completion (ETC)

are declined. These costs of inventories may not be

s may not also be recoverable. In effect, COSTS OF

MOUNT) IN EXCESS OF AMOUNTS EXPECTED TO BE

VALUE which is computed as follows:

sured at the LOWER OF COST AND NET REALIZABLE

porting period.

t of Sales (under perpetual inventory system) or Income

n are clearly identified in the statement of

ited to LOSS ON INVENTORY WRITEDOWN and credited

hensive Income. It is included in the

Debit balance
Debit balance

ce reported at cost.

ween costs and net realizable value at year end.

n to the cost of sales section of the statement of

p to the extent only of the balance of the Allowance for

on from the cost of sales section of the statement of

Debit balance
ain - Credit balance

This includes standard costing, direct costing, and others.

ency and volume of operations.

both in number of hours and prices), and factory

variance which can be favorable (F) or unfavorable (UF)

cation, excessive spoilage, and idle time which are all

adjustments or not.
d costs will reasonably approximate costs computed

duction like material cost, labor costs and variable factory

ore, deducted from current revenues. This includes costs

of outputs like indirect labor (production supervisor's

gned as its cost as inventory cost, and then charged to

yze cost, price, and volume relationships.
or external reporting.

at fixed quantity.

of the buyer because of possible decline in future

is a decline) is charged or debited LOSS ON

under Other Expenses. The corresponding liability

ccount is reported in the statement of financial

h the decline took place.

e under the following conditions:

es entered into for the purpose of balancing,

ffects of price fluctuations.

e full amount of fixed or agreed price with corresponding

nce (squeeze figure).

is to be recognized.

ice), the increase is recognized as GAIN ON PURCHASE

TMENT PREVIOUSLY RECORDED.

f the Statement of Comprehensive Income.

asured at NET REALIZABLE VALUE at CERTAIN STAGES

racted and a sale is assured under a forward contract or

ell.
UE LESS COST TO SELL.
ween knowledgable and willing parties in an arm's length

tly, difficult and inconveniet to apply at a certain

items for financial reporting purposes.

e issuance of financial statements.

or other catastrophe for insurance claim.

represents inventory items on hand BEFORE theft (within or without the location)
not in the location of theft
represents inventory items on hand BEFORE theft (in location)
represents inventory items on hand AFTER theft (in location)

represents items on hand or in your location during date of fire

like goods out on consignment and in transit (included in purchases amount)

this represents inventories damaged/destroyed by fire

This represents recovery of fire loss by having income

inventory is not necessary.

WANCES and SALES DISCOUNTS because these

at cost
, beginning - physical count xxx
ness documents
upported by
 business documents
s (gross) - Supplier's invoice xxx

supported by
Discounts - Supplier's CM (xxx)
returns - Supplier's CM (xxx)
allowances - Supplier's CM (xxx)
- Supplier's service invoice xxx
ailable for sale - per record xxx
st sales (compute using SALES) xxx
, ending, per record, at cost ?
Notes: Sales are supported by our
SALES INVOICE

es x Cost Ratio which is less than 100%.

es divide by Sales Ratio of more than 100%

e every accounting period, thus, there is also a

he use of GROSS PROFIT RATE.

60% =160%) 125

100 (S x 100/125)
25
- P 56,250 = P 33,750)

arge number of rapidly changing items with similar

ethod.

nd markdown

eep track of unit cost at

es.

Margin
GPR (sales) GP amt.
37.50% 30
36.17% 17

37.50% 30,000
37.50% 12,000
37.50% 15,000
37.50% 3,000

37.50%

Adjusted
53 100.00%
33 62.26%
20 37.74%
compute COST RATE after considering markup (+) and markdown (-) (at retail]
= GAFS at cost/GAFS at retail

If GAFS will decrease,

COST OF SALES (at
retail) will also decrease

If GAFS will decrease,

COST OF SALES (at retail
and at cost) will also
decrease

SALES TO EMPLOYEE WITH 20% DISCOUNT

NORMAL SP SOLD TO EMPLOYEE (20%)
%
ee discount and not the regular selling Selling Price 200 100% 200 100%
Cost of sales 120 60% 120 60%
e ignored because these do not Gross profit 80 40% 80
hysical movement of inventory.
t sale recorded is net of employee discount)

WHAT IS THE GIVEN includes:

Net Sales - less than 100% xxx
Sales Discount xxx
Sales Allowance xxx
Sales Return xxx

To present in the computation:

Net Sales - less than 100% xxx
Sales Discount (add back) xxx
Sales Allowance (add back) xxx
Sales - gross - at 100% xxx

below the original sales price.

above the original sales price.

for all of the above items.

Cost is P 5 GP
100 95
NET MARKUP:
80 20% discount 75
P 10 - P 3 = P7
70 30% discount 65
(while original sales price is P 150) 20 80% discount 15
(P 150 + P 7 Net mark-up) 10 90% discount 5

150
200
140 30% discount
NET MARKDOWN: 120 40% discount
P5-P3=2

(while original sales price is P 150)

(P 150 - P 2 net markdown) 160
112 30% discount
COST RATE, the GAFS is higher in total
urchases:

COST RATE is lower in total because it

o higher cost ratio.

INESS NON-VAT-REGISTERED BUSINESS John John:
As buyer: The seller here is a VA
Purchases/Inventory (Purchase cost + Input VAT) registered business. T
112,000
Cash (P 100,000 + P 12,000 Input VAT) he will compute the o
P 100,000 x 12% = P
112,000

As seller:
Cash 150,000
Sales (112,000 cost +38,000 Gross profit)
John John: 18,000
P 12,000 -150,000
Input VAT
p 6,000 - Excess
Notes:
John John:
P 12,000 - Input VAT
p 6,000 - Excess

The P 12,000 input VAT paid to the seller is now debited to Inventory or
Purchases, instead of debiting Input VAT. Therefore, the P 12,000 input VAT is
6,000 a irrevocable or nonrecoverable tax.
12,000

6,000
 TOTAL

400 100%
240 60%
40%
NESS John John:
The seller here is a VAT
registered business. Therefore,
he will compute the output VAT.
112,000
P 100,000 x 12% = P 12,000

150,000
ed to Inventory or
he P 12,000 input VAT is
 INTRODUCTORY DISCUSSION:

Year 1 Year 2 Year 3

Year 2020 Year 2021 Year 2022
beginning Merchandise Inventory, January 1 0 5,000 10,000
Add: Purchases (AT COST) 50,000 60,000 65,000
Cost of goods available for sale (GAS) 50,000 65,000 75,000
ending Less: Merchandise Inventory, December 31 5,000 10,000 15,000
Cost of Sales 45,000 55,000 60,000

INCOME STATEMENT:
Net Sales 100,000 120,000 140,000
Less:Cost of Sales 45,000 55,000 60,000
Gross Profit from Sales 55,000 65,000 80,000
Less: Operating Expenses 50,000 55,000 60,000
Net Income (loss) 5,000 10,000 20,000

PERIODIC INVENTORY SYSTEM

A. Purchases on credit Purchases (EXPENSE) xxx
PURCHASES RELATED TRANSACTIONS

(AT COST) Accounts Payable

B. Paid freight-cost. Freight-in (EXPENSE-ADJUNCT) xxx

Cash

B. Return goods to vendor due Accounts Payable xxx

to major defects (Credit Purchase Returns (CONTRA-EXP)
Memo from vendor)

C. A reduction in price is Accounts Payable xxx

granted due to minor defects Purchase Allowance (CONTRA-EXP)
(CM from vendor).

E. Payment of accounts within Accounts Payable xxx

the discount period Purchase Discount (CONTRA-EXP)
Cash
 F. Sold goods on credit. Accounts Receivable xxx
(AT SELLING PRICE) Sales Revenue (INCOME)
SALES RELATED TRANSACTIONS

G. Goods were returned by Sales Returns (CONTRA-INC) xxx

customers due to major Accounts Receivable
defects.

H. Sales Allowances (CONTRA-INC) xxx

An reduction in price is Accounts Receivable
granted to customer due to
minor defect of products sold

I. Collection of customer's Cash (net of discount) xxx

account within the discount Sales Discount (CONTRA-INC) xxx
period Accounts Receivable

Accounts Receivable
Debit Credit
Beginning bal. xxx
Credit sales xxx xxx Sales returns
xxx Sales allowances
xxx Sales discount
xxx Cash collection from AR (net of SD)
xxx Write-off (worthless accounts)
xxx xxx

Ending bal. xxx

FORMULA FOR ACCOUNTS RECEIVABLE:

Accounts receivable, beginning xxx
Add: Credit Sales xxx
Total accounts receivable during the period xxx
Less: Decreases
Sales returns xxx
Sales allowances xxx
Sales discount xxx
Cash collection from AR (net) xxx
Write-off (worthless accounts) xxx xxx
Accounts receivable, ending xxx
 J. Establishment or setting up Merchandise Inventory, ending (Asset) xxx
of inventory at year-end Income Summary
through physical
YEAR-END PROCEDURES counting.

K. Inventory shortage (actual NO ENTRY

physicial count of inventory
versus inventory stock cards
balance).

L. Inventory overage (actual NO ENTRY

physicial count of inventory
versus inventory stock cards
balance).

DIY EXERCISE 2-1.5 (Reconstruction of Accounts Receivables)

From each of the following independent situations, prepare the requirements in good form.

SITUATION 1 (Computation of Accounts Receivable Ending Balance)

Certain information relative to the operation of Julian Company follows:

Accounts receivable, January 1 800,000

Account receivable collected 2,600,000
Cash sales 500,000
Inventory, January 1 1,200,000
COS

Inventory, December 31 1,100,000

Purchases 2,000,000
I.S. Gross profit on sales 900,000

What is the accounts receivable balance at December 31?

SOLUTION:
Accounts Receivable
Debit Credit
Accounts receivable, January 1 (given) 800,000
Account receivable collected (given) 2,600,000
Credit sales (missing figure) 2,500,000
Total 3,300,000 2,600,000

Accounts Receivable, December 31 700,000

Supporting computation FOR CREDIT SALES:

Inventory, January 1 (given) 1,200,000
Add: Purchases (given) 2,000,000
Goods available for sale 3,200,000
Less: Inventory, December 31 (given) 1,100,000
Cost of Sales 2,100,000
Add: Gross profit on sales (GIVEN) 900,000
Total Sales (cash sales & credit sales) 3,000,000
Less: Cash Sales (given) 500,000
Credit Sales (ON ACCOUNT) 2,500,000

CHECKING
Accounts Receivable, January 1 800,000
Credit sales (See supporting comp.) 2,500,000
Collection of AR (2,600,000)
Accounts Receivable, December 31 700,000

SITUATION 2 (Determining Accounts Receivable and NRV)

Presented below are the selected account balances from the accounting records of Mighty Company, Inc.
for the month of December 2021:

Credit Sales 5,000,000

Cash Sales 500,000
> than 100% Cash receipts from collection of customers’ accounts 4,500,000
Accounts Receivable, December 1, 2021 350,000
Sales Returns and allowances 15,000
discount rate Sales Discount 10,000
Allowance for Doubtful Accounts, December 31, 2020 5,000

Required:
A. What is the Accounts Receivable balance at December 31, 2020?
B.
What is the estimated realizable value (ERV) of Accounts Receivable at December 31, 2020?

SOLUTION - REQUIREMENT (A)

Accounts Receivable
Debit Credit
Accounts Receivable, December 1, 2021 350,000
Cash receipts from collection of
customer's accounts (net of discount) 4,500,000
Sales Returns and allowances 15,000
Sales Discount 10,000
Credit sales 5,000,000
Total 5,350,000 4,525,000

Accounts Receivable, December 31 825,000

STRAIGHT-COMPUTATION FOR REQ. A

Accounts Receivable, December 1, 2020 350,000
Credit sales 5,000,000
Cash receipts from collection of cust. Acts. (4,500,000)
Sales Returns and allowances (15,000)
Sales Discount (10,000)
Accounts Receivable, December 31 825,000
Cash 4,500,000
Sales Discount 10,000
Accounts Receivable 4,510,000

SOLUTION - REQUIREMENT (B)

Accounts Receivable, 12/31/2020 825,000 From requirement A
Less: Allowance for D/A, 12/31/2020 5,000 Given
Estimated Realizable Value, 12/1/2020 820,000

SITUATION 3 (Computation of Accounts Receivable Shortage)

The following information from Jumbo Company’s first year of operations is to be used in treating the
accuracy of Accounts Receivable. The December 31, 2020 balance is P 360,000.

a. Collection from customers, P 720,000.

b. Merchandise purchased, P 980,000
COS

c. Ending merchandise inventory, P 235,000.

d. Goods sell at 50% (Gross Profit Rate) above cost (Basis)
e. All sales are on account.

Required:
A. Compute the balance that Accounts Receivable should show.
B. Determine the amount of any shortage or overage.

SOLUTION - REQUIREMENT (A)

Accounts Receivable
Debit Credit
Credit sales 1,117,500
Collection from customers 720,000
Total 1,117,500 720,000

Accounts Receivable, December 31 397,500

COS Acts. Rec.

Merchandise purchased (given)/GAFS 980,000
Less: Ending merchandise inventory (given) 235,000
Cost of sales - 100% 745,000
Multiply by 100% + mark-up rate of 50% 150%
Sales Revenue (on account)/Credit sales 1,117,500 1,117,500
Less: Collection from customers 720,000
Accounts Receivable per audit, 12/31/2020 397,500

Cost of Sales 100% 745,000

Add: Gross profit (P 745,000 x 50%) 50% 372,500
 Sales 150% 1,117,500

SOLUTION - REQUIREMENT (B)

Accounts Receivable, per audit, 12/31/2020 397,500 accountability (should be)

Less: Accounts Receivable, per book, 12/31/2020 360,000 given
Accounts Receivable shortage 37,500

Possible cases why there is AR shortage:

(a) Not all sales invoices are recorded in accounting books. (CREDIT SALES)
(b) Over recording of amount regarding collections and sales returns and allowances
 NOTES:
COST means PUHUNAN
Freight-in is also called Transportation-in or Inward Transportation
Freight-out is also called Transportation-out or Outward Transportation

UNSOLD
SOLD (PUHUNAN SA BENTA)

KITA SA BENTA
PUHUNAN SA BENTA
BUONG TUBO SA BENTA

NATIRANG KITA (LUGI)

SYSTEM PERPETUAL INVENTORY SYSTEM

Merchandise Inventory (Asset) xxx
xxx Accounts Payable xxx

Merchandise Inventory xxx

xxx Cash xxx

Accounts Payable xxx

xxx Merchandise Inventory xxx

Accounts Payable xxx

xxx Merchandise Inventory xxx

Accounts Payable xxx

xxx Merchandise Inventory xxx
xxx Cash xxx

Merchandise Inventory
Debit Credit
Beginning balance xxx
Purchases - cash or credit basis xxx
Freight-in xxx
Purchase returns xxx
Purchases allowances xxx
Purchase discounts xxx
Sales - cash or credit sales (COS) xxx
Sales returns xxx
Total xxx xxx
 Ending balance xxx

Accounts Receivable (at selling price) xxx

xxx Sales Revenue (at selling price) xxx

Cost of Sales (at cost) (EXPENSE) xxx

Merchandise Inventory (at cost) xxx

Sales Returns xxx

xxx Accounts Receivable xxx

Merchandise Inventory xxx

Cost of Sales xxx

Sales Allowances xxx

xxx Accounts Receivable xxx

Cash xxx
Sales Discount xxx
xxx Accounts Receivable xxx

Regular AR Transactions:
A. Beginning balance of AR, unless year 1
B. Credit sales during the accounting period
C. Collection of AR

from AR (net of SD) Other transactions in T-account for AR not regular transactions:
hless accounts) A. Sales returns
B. Sales Allowances
C. Write-off
D. Recovery of accounts previously written-off
 NO ENTRY
xxx

Inventory Shortage xxx

Merchandise Inventory xxx

Merchandise Inventory xxx

Inventory Overage xxx

od form.
 Mighty Company, Inc.

e at December 31, 2020?

used in treating the
00.
ccountability (should be)

d allowances
DIY EXERCISE 3-3.1 (Inventoriable Costs)
INSTRUCTIONS: For each individual situation, determine the required amount at reporting date.

SITUATION 1 (Inventoriable costs)

The costs set out below are those typically incurred by manufacturing businesses. Under column (3), write YES if the give
cost is inventoriable and NO if not. If the answer is YES, write the amount of inventoriable costs under column (4).

Inventoriable?
Yes/No Amount
No. Items Recognition Measurement
(Col. 3) Col. 4)
1 Supplier’s gross price for raw materials, P 150,000 YES 150,000
2 Materials purchased from another supplier on extended credit
amounting to P 570,000. The price to be paid under normal YES 550,000
credit term is P 550,000.
3 Invoice price of raw materials purchased amounting to P
180,000. Quantity discounts of 10, 5 are allowed by supplier. YES 180,000

4 Materials purchased from a supplier amounting to P 616,000,

inclusive of 12% VAT. The company is VAT registered and YES 550,000
can claim this as an input VAT.
5 Materials purchased from a supplier amounting to P 515,000,
YES 515,000
inclusive of nonrecoverable purchase tax of P 15,000.
6 Cost of transporting raw materials to the business premises,
P 5,000.
YES 5,000

7 Import duties to authorities on import of raw materials to be

YES 25,000
used during the manufacturing process, P 25,000.
8 Labor cost directly incurred in the processing of raw materials,
YES 420,000
P 420,000
9 Normal amount of wasted labor, P 57,000
YES 57,000
10 Abnormal amount of wasted labor, P 69,000
NO -

SITUATION 2 (Inventoriable costs)

The costs set out below are those typically incurred by manufacturing businesses. Under column (3), write YES is the give
cost is inventoriable and NO if not. If the answer is YES, write the amount of inventoriable costs under column (4).

Inventoriable Costs?
Yes/No Amount
No. Items Recognition Measurement
(Col. 3) Col. 4)
1 Cost of transporting goods to customers on sale, P 2,500.
NO -

2 Non-recoverable purchase taxes charged to customers on

sale, P 12,000
NO -
2 Non-recoverable purchase taxes charged to customers on
sale, P 12,000
NO -
3 Non-recoverable sales taxes, P 14,440.
NO -

4 Commission payable to salesmen on the sale of the goods, P 14,500.

-
NO
5 Provision for bad and doubtful debts in relation to trade receivable, P
56,000. -
NO
6 Costs of the accounts department, P 140,000 NO -
7 Head office costs relating to the overall management of the business,
P 234,000. NO -
8 Borrowing cost incurred on inventories that takes substantial
YES 122,000
amount of time to create, P 122,000.
9 Storage cost for a manufacturing product, P 56,000 YES 56,000
10 Selling costs, P 45,600. NO -
11 Non-production overhead costs of designing products for a
YES 10,000
specific customer, P 10,000.
12 Storage cost of finished goods, P 23,000
NO -
13 Fixed administration costs/overheads (rent of office), P 450,000 NO -
14 Insurance on in-transit inventories, p 17,800
YES 17,800
15 Freight incurred when the inventories were returned and
NO -
redelivered, P 34,100
16 Foreign exchange differences arising directly on the recent
acquisition of inventories invoiced in a foreign currency. The
NO -
peso equivalent when acquired is P 567,000 and the peso
equivalent of the merchandise when paid is P 577,000.
olumn (3), write YES if the given
costs under column (4).

Explanation

This is the invoice price.

The amount to be recorded is based on the price under
normal credit term. The difference between the two
prices is interest expense over credit term.
Invoice price means the quantity discount or trade
discount was already deducted. Trade discount is
deducted from catalog price or list price.
This is an example of recoverable purchase tax since it
can be claimed as an input tax. Computation: P 616,000
VAT Inclusive / 1.12 = P 550,000
Nonrecoverable purchase tax is inventoriable cost.

Buyer. This is freight-in because the item is raw

materials. It means you purchased this item as BUYER.
Freight in is added to cost of purchases or inventories.

Import duties are inventoriable costs

Labor cost is a production cost, therefore, inventoriable

cost. (CONVERSION COSTS)
Normal wasted labor cost is capitalized as cost of the
product; debit to Work in Process (asset).
Abnormal waste is not an inventoriable cost but
charged or debited to cost of sales (expense).

olumn (3), write YES is the given

costs under column (4).

Explanation

Seller. This is freight-out or delivery expense or

Outward transportation which is a selling expense. Any
cost incurred after the production is not chargeable to
inventory.
Seller. This is related to sale, not part of inventory.
Seller. This is related to sale, not part of inventory.
Example is VAT included in invoice price but the buyer
(customer) is a NON-VAT REGISTERED ENTITY.
Seller. This is related to sale, not part if inventory. An
example is a sale to non-VAT registered buyer /
customer.
Seller. This is the selling expense.

This can either be selling or administrative expense.

This is administrative expense.

This is administrative expense.

Capitalize to Inventory account; this is the interest on

borrowed money
Currently in stage production.
This is selling expense.
Customized products

This is not a cost to bring the products to their present

location or condition. This is not an inventoriable cost.
This is administrative expense.
Buyer. This silently refers to materials purchased that
are in transit.
Seller. Expensed outright. This is a result of inefficiency.

Foreign exchange difference is not capitalized as

inventory but recognized as FOREIGN EXCHANGE LOSS.
The amount to be capitalized as inventory cost is P
567,000.
INTRODUCTORY DISCUSSION
Merchandise Inventory
Debit Credit
Beginning balance xxx
Purchases - cash or credit basis xxx
Freight-in xxx
Purchase returns xxx
Purchases allowances xxx
Purchase discounts xxx
Sales - cash or credit sales (COS) xxx
Sales returns xxx
Total xxx xxx

Ending balance xxx This is DIY-E3-3.2

NOTES:
The assumption here, the business is using the periodic inventory system in which to determine the ending
inventory, physical counting of goods unsold and on hand is required to be performed.

Normally,only inventories on the location like warehouse, stockroom, stores (window display, counter, stockroom),
inside the delivery trucks within the compound of the entity, are counted. Those that are not in the location during
the count are not counted like goods in transit, goods on hands of consignee, salesmen and agents.

CONSIGNMENT - TWO PARTIES:

1) Consignor - manufacturer and owner of goods; inventories are included in his ending inventory as long these are u
2) Consignee - an agent who will sell the goods owned by the consignor; inventories are excluded in his ending invent

Basic procedures to follow:

(a) Identify the location of all inventories.
(b) Perform physical count and inspection.

DIY EXERCISE 3-3.2 (Computation of Correct Inventory Amount)

INSTRUCTIONS: For each individual situation, determine the required amount at reporting date.

SITUATION 1 (Correct Inventory Amount Computation)

Amiable Company provided the following data at year end:

Items counted in the bodega

Items included in the count specifically segregated per sales contract
Items in receiving department, returned by customer, in good condition
Items ordered and in the receiving department, invoice not received
Items ordered, invoice received but goods not received. Freight is paid by the seller
Items shipped today, invoice mailed, FOB shipping point
Items shipped today, invoice mailed, FOB destination
Items currently being used for window display
Items on counter for sale
 Items in receiving department, refused by us because of damage
Items included in count, damaged and unsalable
Items in the shipping department

Required:
Compute the correct amount of inventory.

SOLUTION:
Items Amount Included Explanation
Items counted in the bodega 4,000,000 4,000,000 Inventory ending, unadjusted
Items included in the count specifically segregated 100,000 (100,000) Seller. Segregated per sales contract.
per sales contract among the items counted in the bodega.
Items in receiving department, returned by 50,000 50,000 Seller. In good condition, already in the
customer, in good condition department (returns)
Items ordered and in the receiving department, 400,000 400,000 Buyer. Already received by the receiving
invoice not received
Items ordered, invoice received but goods not 300,000 - Buyer. Term is FOB Destination the f
received. Freight is paid by the seller. the seller; still in transit (not yet receive
Items shipped today, invoice mailed, FOB shipping 250,000 - Seller. Already shipped. Title to goods is
point buyer
Items shipped today, invoice mailed, FOB Seller. Title to goods is still with the sell
150,000 150,000
destination transit (shipped).
Items currently being used for window display 200,000 200,000
Items on counter for sale 800,000 800,000
Items in receiving department, refused by us 180,000 - Buyer. Refused to accept upon delivery.
because of damage
Items included in count, damaged and unsalable 50,000 (50,000) Damaged and unsalable. Assumed to be
items counted in the bodega.
Items in the shipping department 250,000 250,000 It is the shipping department and not at
the seaport.
Correct amount of inventory 5,700,000

COMPOUND

Seller's Delivery Truck Receiving Releasing/Shipping

WAREHOUSE
Department Department
(Bodega)
OUR Delivery Truck

SITUATION 2 (Correct Inventory Amount Computation)

Natal Company provided the following information:

Materials
Advances for materials ordered
Goods in process
Unexpired insurance on inventories
Advertising catalogs and shipping cartons
 Finished goods in factory
Finished goods in company-owned retail store, including 50% profit on cost
Finished goods in hands of consignee 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 P 30,000
Goods held on consignment, at sales price, cost P 150,000

Required:
Compute the correct amount of inventory.

SOLUTION:
Items Amount Included
Materials 1,400,000 1,400,000
Advances for materials ordered 200,000 - Advances to suppliers; payment in advan
Goods in process 650,000 650,000
Unexpired insurance on inventories 60,000 - Prepayments; Prepaid Insurance
Advertising catalogs and shipping cartons 150,000 - Supplies (advertising supplies and shippin
Finished goods in factory 2,000,000 2,000,000
Finished goods in company-owned retail store, 750,000 500,000 Cost = P 750,000 selling price /
including 50% profit on cost (Gross profit based on cost)
Finished goods on hands of consignee including 400,000 240,000 Consignor. Cost = P 400,000 selling pri
40% profit on sales (Gross profit based on sales)
Finished goods in transit to customers, shipped 250,000 250,000 Seller. Still owned by seller because of F
FOB destination, at cost
Finished goods out on approval, at cost 100,000 100,000 Seller. Still owned by the seller
Unsalable finished goods, at cost 50,000 - Unsalable - exclude
Office supplies 40,000 - Supplies or prepayments (prepaid expens
Materials in transit shipped FOB shipping point, 330,000 360,000 Buyer. Title to materials is with the buye
excluding freight of P 30,000 required to pay the freight). Freight is to

Goods held on consignment, at sales price, cost 200,000 - Consignee

P 150,000
Correct amount of inventory 5,500,000

BASED ON COST: Amount GP % Based on cost Therefore Amount

Sales (given) 168 ? ? 140% 168
Less: Cost of Sales ? ? 100% 100% 120
Gross profit (given) ? 40% 40% 40% ?

If GP is based on cost, cost of sales is 100%.

Therefore, to determine the COS in pesos, sales amount / sales rate of more than 100% (100% + gros

BASED ON SALES: Amount GP % Based on sales Therefore Amount

Sales (given) 168 ? 100% 100% 168
Less: Cost of Sales ? ? ? 60% 101
Gross profit (given) ? 40% 40% 40% ?

If GP is based on SALES, sales is 100%.

Therefore, to determine the COS in pesos, sales amount multiply by the cost rate of less than 100% (1
ermine the ending

counter, stockroom),
t in the location during
agents.

nventory as long these are unsold.

excluded in his ending inventory.

4,000,000
100,000
50,000
400,000
300,000
250,000
150,000
200,000
800,000
 180,000
50,000
250,000

Explanation
ending, unadjusted
egated per sales contract. Already included
ems counted in the bodega.
ood condition, already in the receiving
(returns)
ady received by the receiving department

m is FOB Destination the freight is paid by

still in transit (not yet received)
ady shipped. Title to goods is already with the

to goods is still with the seller. The goods are in

ped).

sed to accept upon delivery. (returns)

d unsalable. Assumed to be included among the

ed in the bodega.
ping department and not at the shipping point of

OUR Delivery Truck

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

Explanation

suppliers; payment in advance for future delivery of materials

s; Prepaid Insurance
vertising supplies and shipping supplies)

0,000 selling price /150% sales rate (note: cost is 100%)

based on cost)
Cost = P 400,000 selling price x 60% cost rate
based on sales)
owned by seller because of FOB Destination term

owned by the seller

exclude
prepayments (prepaid expense)
to materials is with the buyer because of FOB shipping point term (buyer is
pay the freight). Freight is to be included. (P 330,000 + P 30,000)

Amount
168
(P 168/140%) 120
48

re than 100% (100% + gross profit rate)

Amount
168
(P 168 x 60%) 101
67
st rate of less than 100% (100% - GP rate)
DIY EXERCISE 3-3.2 (Recording Inventory Transactions)
INSTRUCTIONS: For each individual situation, record the given business transactions.

SITUATION 1 (Two Inventory Accounting Systems))

Rainy Days Company is a wholesaler of high-quality raincoat. At January 1 of the current year, the entity’s inventory
consisted of 900 raincoats priced at P 100 each. During the current year, the following events occurred:

. Purchased 8,000 raincoats on credit from Happy Days Corporation at P 100 each.
. Returned to suppliers 500 defective raincoats and received credit memorandum.
. Partially paid 6,000 of the raincoats purchased.
. Sold 7,900 raincoats on credit to various customers at P 200 each.
. condition.
. Collected cash from various customers for 6,800 of the raincoats sold.
. At December 31, the physical count

Required:
. Journal entries, including adjustments to record the above transactions using the periodic and perpetual system.
. Prepare partial statement of comprehensive income for the year ended.

SOLUTION:
Requirement 1 - Journal Entries

PERIODIC INVENTORY SYSTEM

No. Transactions Account Names Debit Credit

Notes:
Inventory,beginning
(900 units x P 100 costper unit) 90,000

. Purchased 8,000 raincoats on Purchases (Expense) 800,000

credit from Happy Days Accounts Payable 800,000
PURCHASES RELATED

Corporation at P 100 each. (8,000 x P 100 cost)

TRANSACTIONS

. Returned to suppliers 500 Accounts Payable 50,000

defective raincoats and received Purchase Returns (Contra-Expense) 50,000
credit memorandum. (500 x P 100 cost)

. Partially paid 6,000 of the Accounts Payable 600,000

raincoats purchased. Cash 600,000
(6,000 x P 100 cost)

. Accounts Receivable 1,580,000

Sold 7,900 raincoats on credit to Sales 1,580,000
various customers at P 200 each. (7,900 x P 200 sales price)
SALES RELATD TRANSACTIONS

. Received 200 raincoats returned Sales Returns 40,000

by various customer and issued Accounts Receivable 40,000
credit memoranda. These goods (200 x P 200 sales price)
were in excellent condition.

. Collected cash from various Cash 1,360,000

customers for 6,800 of the Accounts Receivable 1,360,000
raincoats sold. (6,800 x P 200)
 . At December 31, the physical Inventory, ending (Asset) 60,000
count of raincoats revealed 600 Income Summary 60,000
units were on hand. (AJE - to (600 x P 100 cost)
establish/set-up ending
inventory)

. Inventory shortage adjustment. NO ENTRY

Requirement 2 - Partial statement of comprehensive income for the year ended.

PERIODIC INVENTORY SYSTEM

No. Transactions Account Names Debit Credit

Revenue from Sales:

Sales 1,580,000
Less: Sales Returns 40,000
Net Sales 1,540,000

Less: Cost of Sales

Inventory, beginning 90,000
Purchases 800,000
Purchase Returns -50,000
Goods available for sale 840,000
Less: Inventory, ending 60,000 780,000

Gross profit 760,000

John John:
the entity needs to perform
physical counting to determine
inventory, ending.

SITUATION 2 (Gross and Net Method)

OHYES Corporation purchased P 120,000 of merchandise on August 1, 2020, subject to trade discount of 10% and
with credit terms of 3/15, n/60. It returned P 30,000 (gross price before trade or cash discount) on August 4. The
company is using periodic inventory system.

Required:
. Prepare journal entries to record the transactions using gross method and net method. Use the following
assumptions: (1) The invoice was paid on August 13, 2020; (2) The invoice was paid on August 20, 2020.
 . Compute cost of sales under each method. Assuming beginning inventory on August 1 is P 50,000 while
ending inventory on August 31 is 40,000 and all discounts are paid within the discount period.

SOLUTION:
Requirement 1 - Journal Entries Using the Two Methods

GROSS METHOD
Date Transactions Account Names Debit Credit
2020
Aug. 1 Purchased P 120,000 of Purchases (Expense) - GROSS 108,000
merchandise, subject to trade Accounts Payable - GROSS 108,000
discount of 10% and with (P 120,000 x 90%)
credit terms of 3/15, n/60.

4 Returned P 30,000 worth of Accounts Payable - GROSS 27,000

goods( gross price before trade Purchase Returns - GROSS 27,000
and cash discount) (P 30,000 x 90%)

13 Full settlement of account. Accounts Payable - GROSS 81,000

(Case A) (within the discount period) Purchase Discount 2,430
Cash - NET 78,570

20 Full settlement of account. Accounts Payable - GROSS 81,000

(Case B) (Beyond the discount period) Cash - GROSS 81,000

Requirement 2 - Computation of Cost of Sales Under the Two Methods

y’s inventory
:

al system.

PERPETUAL INVENTORY SYSTEM

Account Names Debit Credit

Notes:
Inventory (900 units x P 100 cost per unit) 90,000

Inventory (Asset) 800,000

Accounts Payable 800,000
(8,000 x P 100 cost)

Accounts Payable 50,000

Inventory (Asset) 50,000
(500 x P 100 cost)

Accounts Payable 600,000

Cash 600,000

Accounts Receivable 1,580,000 About recognition of increase in

Sales (7,900 x P 200 sales price) 1,580,000 sales revenue

Cost of Sales (Expense) 790,000 About movement of physical

Inventory (Asset) 790,000 inventory; recognition of
(7,900 x P 100 cost) increase in expense (COS)

Sales Returns (200 x P 200 sales price) 40,000 About recognition of decrease in
Accounts Receivable 40,000 sales revenue

Inventory (Asset) 20,000 About movement of physical

Cost of Sales 20,000 inventory; recognition of
(200 x P 100 cost) decrease in expense (COS)

Cash 1,360,000
Accounts Receivable 1,360,000
 NO ENTRY

Cost of Sales 10,000

Inventory 10,000

Computation of Inventory balance: Units Pesos

Inventory, beginning balance
(900 units x P 100) 900 90,000
Purchases (At P 100 each) 8,000 800,000
Purchase Returns (at P 100) (500) (50,000)
Cost of goods available for sale 8,400 840,000
Sales (cost is P 100) (7,900) (790,000) Cost of
Sales Return (at cost P 100) 200 20,000 Sales
Inventory, ending, PER BOOK (at cost) 700 70,000
Less: Inventory, ending, PER COUNT
(600 units X p 100) 600 60,000
INVENTORY SHORTAGE 100 10,000

PERPETUAL INVENTORY SYSTEM

Account Names Debit Credit

Revenue from Sales:

Sales 1,580,000
Less: Sales Returns 40,000
Net Sales 1,540,000

Less: Cost of Sales 780,000

Gross profit 760,000

perform
determine

ount of 10% and

n August 4. The

the following
ust 20, 2020.
0,000 while
d.

NET METHOD
Account Names Debit Credit

Purchases (Expense) - NET 104,760

Accounts Payable - NET 104,760
(P 108,000 X 97%)

Accounts Payable - NET 26,190

Purchase Returns - NET 26,190
(P 30,000 x 90% x 97%)

Accounts Payable - NET 78,570

Cash - NET 78,570

Accounts Payable - NET 78,570

Purchase Discount Lost (Other Expense) 2,430
Cash - GROSS 81,000
DIY EXERCISE 3-3.4 (Lump-sum Acquisition)

SITUATION 1
On October 1, 2020, Max Corporation purchased the following inventories at a basket price of P 200,000.

Product Quantity Market Value

A 5,000 P 10 per unit
B 3,000 P 20 per unit
C 2,000 P 70 per unit

Required:
. Compute the allocation of the basket price of P 200,000.
. Record the acquisition of inventories using the periodic inventory system.

SOLUTION:
. Compute the allocation of the basket price of P 200,000.

Product Quantity MV per unit Total MV Fraction Computation

A 5,000 10 50,000 5/25 (A) P 200,000 x 5/25
B 3,000 20 60,000 6/25 (B) P 200,000 x 6/25
C 2,000 70 140,000 14/25 (C) P 200,000 x 14/25
250,000 25/25 (Total)

. Record the acquisition of inventories using the periodic inventory system.

Account Names Debit Credit

Purchases (expense) 200,000
Accounts Payable 200,000

Note:
If perpetual system is used, the journal entry would be:

Account Names Debit Credit

Inventory (Asset) 200,000
Accounts Payable 200,000

User:
SITUATION 2 (Cost of Unsold Lot) TAKE NOTE:
In this problem, land is not PPE but INV
Landmark Company purchased a tract of unimproved land for P 26,850,000. The intention to sell and not to use in busin
land was improved and subdivided into residential lots at a cost of P 43,500,000. land development is debited to INVENT
CAPITAL EXPENDITURE (disbursements
Group No. of Lots Sales price per lot
1 20 3,000,000
2 10 2,500,000
3 10 2,000,000 User:
Since the total cost of land (cost + development cost) is a
lump-sum price, we must allocate the amount among
groups of land based on RELATIVE SALES PRICE METHOD
(or total fair market value).
 User:
Since the total cost of land (cost + development cost) is a
lump-sum price, we must allocate the amount among
Lots unsold at the end of the year are: groups of land based on RELATIVE SALES PRICE METHOD
Group 1 5 lots (or total fair market value).
group 2 4 lots
Group 3 3 lots

Required:
Compute the cost of unsold (Ending inventory) lots at the end of the year.

SOLUTION:

Step 1: Allocation of basket price among groups of lots:

GIVEN IN THE PROBLEM ALLOCATION USING RELATIVE SP METHOD

Group No. of Lots Sales price per lot Total SP Fraction Allocation
1 20 3,000,000 60,000,000 60/105 40,200,000
2 10 2,500,000 25,000,000 25/105 16,750,000
3 10 2,000,000 20,000,000 20/105 13,400,000
105,000,000 70,350,000

Acquisition cost of land as inventory 26,850,000

Development cost of land 43,500,000
Total cost of land as inventory 70,350,000 This is the BASKET PRICE

Step 2: Computation of the cost of unsold lots at the end of the year.

Group 1 Group 2
Total number of unsold lots at year-end 5 4
Multiply by Cost per lot 2,010,000 1,675,000
Cost of lots unsold at the end of the year 10,050,000 6,700,000

What if the question is - the cost of land sold during the year?
Group 1 Group 2
Total lost available for sale during the year 20 10
Less: Total lots unsold during the year 5 4
Total number of sold lots at year-end 15 6
Multiply by Cost per lot 2,010,000 1,675,000
Cost of lots sold at the end of the year 30,150,000 10,050,000

ALTERNATIVE SOLUTION:
Available for sale (based on total allocation) 40,200,000 16,750,000
Less: Cost of lots unsold 10,050,000 6,700,000
Cost of lots sold at the end of the year 30,150,000 10,050,000

SITUATION 3 (Cost of Unsold Lot)

User:
TAKE NOTE:
Solid Company purchased a plot of ground for P 18,000,000. The In this problem, land is not PPE but INVENTORY (acquire
entity also paid an independent appraiser for the land the amount with intention to sell and not to use in business
of P 500,000. The land was developed as residential lots at a total operations). The cost of land development is debited to
cost of P 41,500,000. The lots were classified as follows: INVENTORY. This is called CAPITAL EXPENDITURE
(disbursements capitalized as asset).
 TAKE NOTE:
In this problem, land is not PPE but INVENTORY (acquire
with intention to sell and not to use in business
operations). The cost of land development is debited to
INVENTORY. This is called CAPITAL EXPENDITURE
(disbursements capitalized as asset).
No. of Lots Sales price per lot
Highland 20 1,000,000
Midland 40 750,000
Lowland 100 500,000

Required:
Compute the total cost of each lot classification.

SOLUTION:
Total Cost of land:
Purchase price of land as inventory 18,000,000
Independent appraiser's fee 500,000
Development costs 41,500,000
Total cost of the land as inventory 60,000,000 This is the BASKET PRICE

Basis of allocation of the total cost of the land:

GIVEN IN THE PROBLEM ALLOCATION USNG RELATIVE SP METHOD

Classif. No. of Lots Sales price per lot Total SP Fraction
Highland 20 1,000,000 20,000,000 20/100
Midland 40 750,000 30,000,000 30/100
Lowland 100 500,000 50,000,000 50/100
100,000,000
 ALLOCATION
Total Cost Unit Cost
40,000 8.00
48,000 16.00
112,000 56.00
200,000

em, land is not PPE but INVENTORY (acquired with

sell and not to use in business operations). The cost of
pment is debited to INVENTORY. This is called
PENDITURE (disbursements capitalized as asset).

ment cost) is a
nt among
RICE METHOD
ment cost) is a
nt among
RICE METHOD

E SP METHOD
Cost per lot
2,010,000
1,675,000
1,340,000

ASKET PRICE

Group 3 TOTAL
3
1,340,000
4,020,000 20,770,000

Group 3 TOTAL
10 40
3 12
7 28
1,340,000
9,380,000 49,580,000

13,400,000
4,020,000
9,380,000

PE but INVENTORY (acquired

to use in business
development is debited to
PITAL EXPENDITURE
asset).
PE but INVENTORY (acquired
to use in business
development is debited to
PITAL EXPENDITURE
asset).

ELATIVE SP METHOD
Per class Per Lot
12,000,000 600,000
18,000,000 450,000
30,000,000 300,000
60,000,000
DIY EXERCISE 3-3.5 (Cost Flow Methods of Inventory)
INSTRUCTIONS: For each individual situation, compute or prepare the requirements of the problem.

SITUATION 1 (Various Costing Method)

Records of the Gladiator New Products Company show the following data relative to Product 143:

Date Transactions Quantity Unit Cost Total Cost

2020
Apr. 1 Balance 20,000 10.00 200,000
2 Purchase 30,000 12.00 360,000
4 Sale 25,000
10 Purchase 15,000 14.00 210,000
15 Sale 21,000
17 Sales return 1,000
28 Purchase 20,000 16.75 335,000

Required:
Based on the above data, compute the following:
. Using the weighted average (periodic) method, determine the following:
a) Cost of inventory at April 30
b) Cost of goods sold for April
. Using the moving average (perpetual) method, determine the following:
a) Cost of inventory at April 30
b) Cost of goods sold for April
. Using the Perpetual FIFO method, determine the following:
a) Cost of inventory at April 30
b) Cost of goods sold for April
. Using the Periodic FIFO method, determine the following:
a) Cost of inventory at April 30
b) Cost of goods sold for April
. Using the specific identification method, determine the following assuming that the units sold on April 4 came from A
2 purchases, the units sold on April 15 came from beginning inventory and the excess from April 10 purchases, and
return of April 17 came from April 1 beginning inventory.
a) Cost of inventory at April 30
b) Cost of goods sold for April

SOLUTION:
. Weighted Average Method (PERIODIC SYSTEM)
SOLUTION:
Goods Available for Sale
Date Transactions Quantity Unit Cost Total Cost
2020
Apr. 1 Balance (BEGINNING) 20,000 10 200,000
2 Purchase 30,000 12 360,000
4 Sale
10 Purchase 15,000 14 210,000
15 Sale
17 Sales return
28 Purchase 20,000 16.75 335,000
Cost of goods availale for sale (units/pesos) 85,000 1,105,000
Cost of goods sold in units (C0S) (45,000)
 Inventory, April 30, in units (ENDING) 40,000
Multiply by weighted average unit cost 13
No. 1 Inventory, April 30, in pesos 520,000
No. 2 Cost of Sales for April 30

Compute first the Weighted average unit cost :

Total cost of goods available for sale in pesos 1,105,000
Divide by CGAFS in units 85,000
Weighted Average unit cost 13.00

. Moving Average Method (perpetual)

SOLUTION:

RECEIVED (Purchases)
Date Transactions Quantity Unit Cost Total Cost
2020
Apr. 1 Balance

2 Purchase 30,000 12 360,000

4 Sale

10 Purchase 15,000 14 210,000

15 Sale

17 Sales return

28 Purchase 20,000 16.75 335,000

65,000 905,000
NOTES:
Compute the moving average unit cost everytime there are purchases.
Moving average unit cost = New total cost ending balance (Pesos) / New total units ending balanc

COMPARISON OF INVENTORY COSTING METHODS

COMPARISON - AVERAGE METHOD
COS Invt, End
Perpetual (moving average method) 525,000 580,000
Periodic (weighted average method) 585,000 520,000

. Perpetual FIFO Method

RECEIVED (Purchases)
Date Transactions Quantity Unit Cost Total Cost
2020
Apr. 1 Balance

2 Purchase 30,000 12.00 360,000

 4 Sale

10 Purchase 15,000 14.00 210,000

15 Sale

17 Sales return

28 Purchase 20,000 16.75 335,000

30 Balances 65,000 905,000

. Periodic FIFO Method

Transactions Quantity Unit Cost Total Cost

Balance (Beginning) 20,000 10.00 200,000
Purchase 30,000 12.00 360,000
Sale 25,000
Purchase 15,000 14.00 210,000
Sale 21,000
Sales return 1,000
Purchase 20,000 16.75 335,000
TOTAL

COMPARISON:
COS Invt, End
Perpetual FIFO 500,000 605,000
Periodic FIFO 500,000 605,000

. Specific Identification Method

 Date Transactions Quantity Unit Cost Total Cost
2020
Apr. 1 Balance 20,000 10.00 200,000
2 Purchase 30,000 12.00 360,000
4 Sale 25,000
10 Purchase 15,000 14.00 210,000
15 Sale 21,000
17 Sales return 1,000
28 Purchase 20,000 16.76 335,000

SOLUTION:
AVAILABLE FOR SALE
Date Transactions Quantity Unit Cost Total Cost
2020
Apr. 1 Balance 20,000 10.00 200,000

2 Purchase 30,000 12.00 360,000

10 Purchase 15,000 14.00 210,000

28 Purchase 20,000 16.75 335,000

COMPARISON:
COS Invt, End
Perpetual (moving average method) 525,000 580,000
Periodic (weighted average method) 585,000 520,000

COS Invt, End

Perpetual FIFO 500,000 605,000
Periodic FIFO 500,000 605,000

COS Invt, End

Specific Identification - Periodic/Perpetual 504,000 601,000

SITUATION 2 (Change of Inventory Costing Method)

Harlot Company began operations on January 1, 2021 and adopted the weighted average method of inventory pricing.
Condensed statements appear below:

2021 2022 2023

Sales 3,000,000 4,000,000 4,800,000
Cost of sales 1,500,000 2,000,000 2,400,000
Gross income 1,500,000 2,000,000 2,400,000
Expenses 800,000 900,000 1,000,000
Net income 700,000 1,100,000 1,400,000

Comparative inventory amounts are:

Weighted Ave. FIFO Difference
As at December 31, 2021 270,000 420,000 (150,000)
As at December 31, 2022 300,000 500,000 (200,000)
As at December 31, 2023 380,000 650,000 (270,000)
Required:
Revise the condensed comparative income statement, assuming the entity uses the FIFO Method.

SOLUTION:
2021 2022 2023
Net income during the year using the weighted average method 700,000 1,100,000 1,400,000
Adjustment - (WA to FIFO):
Inventory, December 31, 2021 - Understated
(P 420,000 - P 270,000) 150,000 (150,000)
Inventory, December 31, 2022 - Understated
(P 500,000 - P 300,000) 200,000 (200,000)
Inventory, December 31, 2023 - Understated
(P 650,000 - P 380,000) 270,000
Net income during the year using the FIFO method 850,000 1,150,000 1,470,000

Revised Condensed Income Statement:

2021 2022 2023
Sales 3,000,000 4,000,000 4,800,000
Cost of sales - FIFO 1,350,000 1,950,000 2,330,000
Gross income 1,650,000 2,050,000 2,470,000
Expenses 800,000 900,000 1,000,000
Net income - FIFO 850,000 1,150,000 1,470,000

Supporting computation - COST OF SALES:

Cost of sales, unadjusted - WA (EXPENSES) 1,500,000 2,000,000 2,400,000
Adjustment:
Inventory, December 31, 2021 - Understated
(P 420,000 - P 270,000) (150,000) 150,000
Inventory, December 31, 2022 - Understated
(P 500,000 - P 300,000) (200,000) 200,000
Inventory, December 31, 2023 - Understated
(P 650,000 - P 380,000) (270,000)
Cost of sales, adjusted - FIFO 1,350,000 1,950,000 2,330,000

NOTES:
Error Cost of Sales Net income
1) INVENTORY, ENDING Overstated Understated Overstated
Understated Overstated Understated
COST OF SALES

2) INVENTORY, BEGINNING Overstated Overstated Understated

Understated Understated Overstated

3) PURCHASES DURING THE YEAR Overstated Overstated Understated

Understated Understated Overstated

4) SALES DURING THE YEAR Overstated Overstated

Understated Understated

5) OPERATING EXPENSES DURING THE YEAR Overstated Understated

Understated Overstated

WORKSHEET
Income Statement Statement of Fin. Position
 Debit Credit Debit
Expenses Income Asset
COST OF SALES:
Merchandise Inventory, ending Beginning Ending Ending
Purchases (Expense) xxx
Purchase returns and allowances xxx
Purchase Discounts xxx
Freight - in xxx

SALES xxx
OPERATING EXPENSES xxx

SITUATION 3 (Computation of COS and EI)

Rocky Company provided the following inventory data for January:

Units Unit Cost

Jan 1 Balance 500 500
9 Purchase 1500 540
29 Purchase 500 600

The entity used the periodic system and determined the inventory on January 31 at 750 units (unsold).

Required:
Compute the cost of ending inventory under FIFO (unsold) and determine the cost of goods sold (sold) under average method.

SOLUTION:
Cost of ending inventory under FIFO
Units Unit Cost Total Cost
From January 29 purchases 500 600 300,000
From January 9 purchases 250 540 135,000
Total January 31 ending inventory 750 435,000

Cost of goods sold under Periodic Average Method (Weighted average costing method):

Units Unit Cost Total Cost

Jan 1 Balance 500 500 250,000
9 Purchase 1,500 540 810,000
29 Purchase 500 600 300,000
Available for sale during January 2,500 1,360,000
Less: January 31 ending inventory (UNSOLD) 750
Number of units SOLD during January 1,750
Multiply by weighted average unit cost
(P 1,360,000 AFS in pesos / 2,500 units AFS) 544
Cost of goods sold under Periodic Average method 952,000
old on April 4 came from April
m April 10 purchases, and the

COS/SOLD
ISSUED

25,000

21,000
(1,000)

45,000
 13

585,000

ISSUED (Cost of Sales) BALANCES

Quantity Unit Cost Total Cost Quantity Unit Cost Total Cost

20,000 10.00 200,000

50,000 11.20 560,000

25,000 11.20 280,000 25,000 11.20 280,000

40,000 12.25 490,000

21,000 12.25 257,250 19,000 12.25 232,750

(1,000) 12.25 (12,250) 20,000 12.25 245,000

40,000 14.50 580,000

45,000 525,000
(No. 4)

otal units ending balance (units)

ISSUED (Cost of Sales) BALANCES

Quantity Unit Cost Total Cost Quantity Unit Cost Total Cost

L1 20,000 10.00 200,000

L1 20,000 10.00 200,000

L2 30,000 12.00 360,000
50,000 560,000
 L1 20,000 10 200,000 L2 25,000 12.00 300,000
L2 5,000 12 60,000
25,000 260,000

L2 25,000 12.00 300,000

L3 15,000 14.00 210,000
40,000 510,000

L2 21,000 12 252,000 L2 4,000 12.00 48,000

L3 15,000 14.00 210,000
19,000 258,000

L2 (1,000) 12 (12,000) L2 5,000 12.00 60,000

L3 15,000 14.00 210,000
20,000 270,000

L2 5,000 12.00 60,000

L3 15,000 14.00 210,000
L4 20,000 16.75 335,000
45,000 500,000 40,000 605,000

IN UNITS Inventory, April 30 (unsold)

UNSOLD
Total Cost GAFS SOLD Invty., end Units Unit cost Pesos
20,000
30,000 5,000 12.00 60,000
25,000
15,000 15,000 14.00 210,000
21,000
(1,000)
20,000 20,000 16.75 335,000
85,000 45,000 40,000 40,000 605,000
from April 2 purchases

from beginning inventory and April 10 (excess)

from beginning inventory

ISSUED (COS)/sold ENDING INVENTORY/unsold

Quantity Unit Cost Total Cost Quantity Unit Cost Total Cost

20,000 10 200,000 0 0
(1,000) 10 (10,000) 1,000 10 10,000

25,000 12 300,000 5,000 12 60,000

1,000 14 14,000 14,000 14 196,000

20,000 17 335,000
45,000 504,000 40,000 601,000

Highest EI
Highest EI

Understated
Understated
Understated
 Counterbalance in second year (self-correcting) - Retained Earnings
Third year of error - No effect in Net Income and in Cost of Sales

Error
Correct EI - Over
GAFS 10 10
Less: Ending Inventory 4 3 Under
Cost of Sales 6 7 Over

EI has direct relationship to NET INCOME

EI has inverse relationship to COST OF SALES
COST OF SALES has inverse relationship to NET INCOME

BI has inverse relationship to NET INCOME

BI has direct relationship to COST OF SALES

PURCHASES has inverse relationship to NET INCOME

PURCHASES has direct relationship to COST OF SALES

SALES has direct relationship to NET INCOME

OPERATING EXPENSES has inverse relationship to NET INCOME

SHEET
Statement of Fin. Position
 Credit
Liab. / Equity

Direct Extension method (B-E-E)

under average method.

WAUC

544
 Cost of Sales (sold)

Units Unit cost Pesos

20,000 10.00 200,000
25,000 12.00 300,000

45,000 500,000
INTRODUCTORY DISCUSSION
A. PURCHASE TRANSACTIONS a) If silent, always on credit
(as BUYER) b) It will increase Purchases (periodic system) or Invento
c) It will increase Inventory at the end of the accounting

B. SALES TRANSACTIONS a) If silent, always on credit

(as SELLER) b) It will increase Sales Revenue and Accounts Receivable
c) It will decrease Inventory at the end of the accounting

C. If the shipping term is FOB SHIPPING POINT a) Detemine immediately the date of shipment.
b) If the shipment happened on or before the end of the
(1) there is already a sale transaction at reporting date
(2) there is already a purchase transaction at reporting
c) If the shipment happened after the end of the reportin
(1) there is no sale transaction yet at reporting date; in
(2) there is no purchase transaction yet at reporting da

D. If the shipping term is FOB DESTINATION a) Detemine immediately the date when goods are receiv
b) If the receipt of goods happened on or before the end
(1) there is already a sale transaction at reporting date
(2) there is already a purchase transaction at reporting
c) If the receipt of goods happened after the end of the r
(1) there is no sale transaction yet at reporting date; in
(2) there is no purchase transaction yet at reporting da

DIY EXERCISE 3-3.6 (Inventory Error Adjustments)

INSTRUCTIONS: For each individual situation, compute or prepare the requirements of the problem.

SITUATION 1 (Inventory Error Adjustments)

Myriad Company revealed the following purchase transactions (the entity is the buyer) occurred during the last fe
the fiscal year, which ends December 31 (cut-off date), and in the first few days after that date. Prepare the adjustm
December 31. Books are still open.

ADJUSTING JOURNAL ENTRIES

No Transactions Account Names
1 An invoice for P 50,000, FOB shipping point, Inventory, 12/31/2020
was received and recorded on December 27. The Income Summary
shipment was received in satisfactory condition on
January 2. The merchandise was not included in If the book is already closed:
the inventory. Inventory, 12/31/2020
Retained Earnings
ANALYSIS:
Myriad Company is the BUYER
FOB Shipping point
Shipping term - FOB Shipping Point Shipment
(a) Goods received on 1/2//2021 Recorded as purchases
> passed already the shipping point in 2020 Ending Inventory
> in transit at 12/31/2020
(b) Owner of goods on 12/31/2020 - BUYER
> must include in ending inventory at 12/31/2020
> must be recorded as Purchases in 2020
 Purchases and A/P recorded on 12/27/2020
(a) Correcly recorded

Excluded in Inventory at 12/31/2020

(a) Must be included in ending inventory
(b) Requires AJE for inventory ending

2 An invoice for P 75,000, FOB Destination, was Accounts Payable

received and recorded on December 28. The Purchases
shipment was received in satisfactory condition on
January 3. The merchandise was not included in If the book is already closed:
the inventory. Accounts Payable
Retained Earnings
ANALYSIS:
Myriad Company is the BUYER

Shipping term - FOB Destination FOB Destination

(a) Goods received on 1/3//2021 Received
> we do not own the goods at 12/31/2020 Recorded as purchases
> we do not have purchases in 2020 Ending Inventory
(b) Owner of goods on 12/31/2020 - SELLER

Purchases and A/P recorded on 12/28/2020

(a) Incorrecly recorded - requires AJE
(b) Purchases/AP are overstated at 12/31/2020

Excluded in Inventory at 12/31/2020

(a) Correctly excluded in ending inventory

3 Purchases
An invoice for P 30,000, FOB shipping point, Accounts Payable
was received and recorded on January 4. The
invoice shows that the goods had been shipped on Inventory, 12/31/2020
December 28 and the receiving report indicates Income Summary
that the goods had been received on January 4.
The merchandise was excluded from inventory.
If the book is already closed:
ANALYSIS: Retained Earnings
Myriad Company is the BUYER Accounts Payable

Shipping term - FOB Shipping point Inventory, 12/31/2020

(a) Goods shipped on 12/28/2020 Retained Earnings
(b) Goods received on 1/4//2021
(c) Owner of goods on 12/31/2020 - BUYER
FOB shipping point
Purchases and A/P recorded on 1/4//2021 Shipped
(a) Must be recorded in 2020 - requires AJE Recorded as purchases
(b) Purchases/AP are understated at 12/31/2020 Ending Inventory

Excluded in Inventory at 12/31/2020

(a) Incorrectly excluded in ending inventory

4 An invoice for P 90,000, FOB shipping point, Income Summary

was received on December 15. The receiving Inventory, December 31, 2020
report indicates that the goods were received on
December 18 but across the face of the report is
the notation “merchandise not of the same quality
as ordered – returned for credit, December 19”.
The merchandise was included in the inventory.
 An invoice for P 90,000, FOB shipping point,
was received on December 15. The receiving
report indicates that the goods were received on
December 18 but across the face of the report is If the book is already closed:
the notation “merchandise not of the same quality Retained Earnings
as ordered – returned for credit, December 19”. Inventory, December 31, 2020
The merchandise was included in the inventory.

ANALYSIS: FOB shipping point

Myriad Company is the BUYER Shipped and received
Recorded as purchase return
Shipping term - FOB Shipping point Ending Inventory YES - Incorrect
(a) Goods received on 12/18/2020
(b) Returned for credit on 12/19/2020

Correctly recorded as purchases on 12/18/2020

Correctly recorded as purchase return on 12/19/2020
OR
Correctly not recorded as purchases and PR

Incorrectly included in inventory at 12/31/2020

(a) Inventory,12/31/2020 is overstated
(b) Income Summary at 1231/2020 overstated

5 An invoice for P 140,000, Shipping point, was Purchases

received and recorded on January 4. The receiving Accounts Payable
report indicates that the goods were received on
December 29. The merchandise was included in If the book is already closed:
inventory. Retained Earnings
Accounts Payable
Myriad Company is the BUYER

Shipping term - FOB Shipping point FOB shipping point

(a) Goods were received on 12/29/2020 Shipped and received
(b) Owned by the buyer on 12/31/2020 Recorded as purchases
Ending Inventory
Recorded as Purchases and AP on 01/04/2020
(a) Must be recorded on 12/31/2020
(b) Requires AJE at 12/31/2020

Correctly included in inventory at 12/31/2020

SITUATION 2 (Inventory inclusion or exclusion)

From the following information as a result of the annual audit of Novelty Corporation on December 31, 2021
merchandise should be included in the inventory on December 31, 2021 and state the reason for each item.

No. Transactions discovered Inventory, 12/31/2021

. Merchandise was received on January 8, 2022, and the EXCLUDED
related purchase invoice recorded on January 5, 2022.
The invoice showed the shipment was made on
December 29, 2021, FOB Destination.

. EXCLUDED
Merchandise was received on December 28, 2021 and
the invoice was not recorded. It was located in the hands
of the purchasing agent and was marked on consignment.
. A packing case containing merchandise was standing in INCLUDED
the shipping room where the physical inventory was
taken. It was not included in the inventory because it was
marked "Hold for shipping instructions." An investigation
revealed that the customer's order was dated December
 A packing case containing merchandise was standing in
the shipping room where the physical inventory was
taken. It was not included in the inventory because it was
marked "Hold for shipping instructions." An investigation
revealed that the customer's order was dated December
18, 2021, but the case was shipped and the customer
billed on January 10, 2021.
. INCLUDED
Merchandise received on January 6, 2022 was recorded
as a purchase on January 7, 2021. The invoice showed
shipment was made FOB supplier's warehouse on
December 31, 2021. Since it was not on hand on
December 31, 2021, it was not included in inventory.
. A special article fabricated to order for a customer, was EXCLUDED
finished and in the shipping room on December 31, 2021.
The customer was billed on that date and the article was
excluded from inventory although it was shipped on
January 4, 2022.

SITUATION 3 (Correct amount of inventory computation)

Audacity Company counted the ending inventory on December 31, 2021 and reported the amount of P 2,000,000 befo

None of the following items were included when the total amount of the ending inventory was computed:

▪ Goods located in the entity's warehouse are on consignment from another entity
▪ Goods sold by the entity and shipped FOB destination were in transit on December 31, 2021
and received by the customer on Januar 2, 2022
▪ Goods purchased by the entity snd shipped FOB shipping point were in transit on December
31, 2021 and received by the entity on January 2, 2022
▪ Goods sold by the entity and shipped FOB shipping point were in transit on December 31,
2021 and received by the customer on January 2, 2022

Question:
What amount of inventory should be reported on December 31, 2021 (cut-off)?

SOLUTION:
Items and Description
Inventory, December 31, 2021, unadjusted
Adjustments:
▪ Goods located in the entity's warehouse are on consignment from another entity
▪ Goods sold by the entity and shipped FOB destination were in transit on December 31, 2021
and received by the customer on January 2, 2022
▪ Goods purchased by the entity and shipped FOB shipping point were in transit on December
31, 2021 and received by the entity on January 2, 2022
▪ Goods sold by the entity and shipped FOB shipping point were in transit on December 31,
2021 and received by the customer on January 2, 2022
Inventory, December 31, 2021, adjusted

SITUATION 4 (Correct amount of inventory computation)

Shindig Company is preparing the 2021 year-end financial statements. Prior to any adjustments, inventory is valued at
7,600,000.

▪ Goods costing P 250,000 were received from a vendor on January 5, 2022. The related invoice was received and
on January 12, 2022. The goods were shipped December 31, 2021, FOB shipping point.
 on January 12, 2022. The goods were shipped December 31, 2021, FOB shipping point.
▪ Goods costing P 850,000 were shipped on December 31, 2021 to a customer FOB shipping point. The goods were
included in ending inventory for 2021 eventhough the sale was recorded in 2021.
▪ A P 350,000 shipment of goods to a customer on December 31, 2021 FOB Destination was not included in the ye
inventory. The goods cost P 260,000 and were delivered to the customer onJanuary 15, 2022. The sale was prop
recorded in 2022.
▪ An invoice for goods costing P 350,000 was received and recorded as a purchase on December 31, 2021. The rel
goods shipped FAS or free along side were in transit on December 31, 2021 and received on January 5, 2022 and
not included in the physical inventory.
▪
A P 1,050,000 shipment of goods to a customer on December 31, 2021 FOB Destination was recorded as a sale in
The goods costing P 840,000 delivered to the customer on January 5, 2022 were not included in 2021 ending inv

QUESTION:
What is the correct inventory on December 31, 2021 (cut-off)?

SOLUTION:
Items and Description
Inventory, December 31, 2021, unadjusted
Adjustments:
▪ Goods costing P 250,000 were received from a vendor on January 5, 2022. The related
invoice was received and recorded on January 12, 2022. The goods were shipped December
31, 2021, FOB shipping point.
▪ Goods costing P 850,000 were shipped on December 31, 2021 to a customer FOB shipping
point. The goods were included in ending inventory for 2021 eventhough the sale was
recorded in 2021.

▪ A P 350,000 shipment of goods to a customer on December 31, 2021 FOB Destination was
not included in the year end inventory. The goods cost P 260,000 and were delivered to the
customer on January 15, 2022. The sale was properly recorded in 2022.

▪ An invoice for goods costing P 350,000 was received and recorded as a purchase on
December 31, 2021. The related goods shipped FAS or free along side were in transit on
December 31, 2021 and received on January 5, 2022 and were not included in the physical
inventory.
▪ A P 1,050,000 shipment of goods to a customer on December 31, 2021 FOB Destination was
recorded as a sale in 2021. The goods costing P 840,000 delivered to the customer on
January 5, 2022 were not included in 2021 ending inventory.

Inventory, December 31, 2021, adjusted

NOTES:
IN FAS or free along side, the seller must bear all expenses and risks involved in delivering the goods
shipped. The buyer bears the cost of lading and shipment and thus, title passes to the buyer when the
SITUATION 5 (Correct amount of inventory and related accounts computation)
Fancy Company is a wholesale distributor of automotive replacements parts. The entity revealed the following
(unadjusted balances) on December 31, 2021:

Inventory at December 31 based on physical count, P 1,250,000

Accounts Payable, P 1,000,000
Sales, P 9,000,000

Additional information:
A. Parts held on consigment on consignment from another entity to Fancy Company, the consignee, amounting to P
were included in the physcial count on December 31, 202, and in accounts payable on December 31, 2021.
B. P 20,000 of parts which were purchased and paid for in December 2021, were sold in the last week of 2021 and
appropriately recorded as sales of P 28,000. The parts were included in the physical count on December 31, 2020
because the parts were on the loading dock waiting to be picked up by the customers.
C. Parts in transit on December 31, 2021 to customers, shipped FOB shipping point, on December 28, 2021, amoun
34,000. The customers received the parts on january 6, 2022. Sales of P 40,000 to the customers for the parts w
recorded by the Fancy Company on January 2, 2022.
D. Retailers were holding P 210,000 at cost and P 250,000 at retail, of goods on consignment from Fancy Company,
stores on December 31, 2021.
E. Goods were in transit from a vendor to Fancy Company on December 31, 2021. The cost of goods was P 25,000.
goods were shipped FOB shipping point on December 29, 2021.

QUESTION:
. What is the correct amount of inventory?
. What is the correct amount of accounts payable?
. What is the correct amount of sales?

SOLUTION:

No. Items
Unadjusted balances at December 31, 2021
A. Parts held on consigment from another entity to Fancy Company, the consignee, amounting
to P 165,000, were included in the physical count on December 31, 2021, and in accounts
payable on December 31, 2021.
B. P 20,000 of parts which were purchased and paid for in December 2021, were sold in the last
week of 2021 and appropriately recorded as sales of P 28,000. The parts were included in the
physical count on December 31, 2020, because the parts were on the loading dock waiting to
be picked up by the customers.
C. Parts in transit on December 31, 2021 to customers, shipped FOB shipping point, on
December 28, 2021, amounted to P 34,000. The customers received the parts on January 6,
2022. Sales of P 40,000 to the customers for the parts were recorded by the Fancy Company
on January 2, 2022.
D. Retailers were holding P 210,000 at cost and P 250,000 at retail, of goods on consignment
from Fancy Company, at their stores on December 31, 2021.
E. Goods were in transit from a vendor to Fancy Company on December 31, 2021. The cost of
goods was P 25,000. The goods were shipped FOB shipping point on December 29, 2021.

Adjusted balances at Decemmber 31, 2021

es (periodic system) or Inventory (perpetual) and Accounts Payable
y at the end of the accounting period.

venue and Accounts Receivable [if perpetual, additional entry - cost of sales (dr) and invntory cr.)]
ry at the end of the accounting period (exclude the inventory sold)

he date of shipment.
ed on or before the end of the reporting period and the goods are in transit at reporting date:
le transaction at reporting date; exclude the item in the inventory of the seller.
urchase transaction at reporting date; include the item in the inventory of the buyer.
ed after the end of the reporting period and the goods are in transit at reporting date:
saction yet at reporting date; include the item in the inventory of the seller.
e transaction yet at reporting date; exclude the item in the inventory of the buyer.

he date when goods are received by or delivered to the buyer.

happened on or before the end of the reporting period:
le transaction at reporting date; exclude the item in the inventory of the seller.
urchase transaction at reporting date; include the item in the inventory of the buyer.
happened after the end of the reporting period:
saction yet at reporting date; include the item in the inventory of the seller.
e transaction yet at reporting date; exclude the item in the inventory of the buyer.

the problem.

er) occurred during the last few days of

that date. Prepare the adjustments on

G JOURNAL ENTRIES
Debit Credit
50,000 User:
50,000 Entry made in December:
Purchases 50,000
AP 50,000
50,000
Entry that should have been made (correct) - December:
50,000 Purchases 50,000
AP 50,000
December January
Inventory, 12/31/2020 50,000
This month Income Summary 50,000
YES - Correct
Adjusting journal entry - December:
NO - Incorrect Inventory, 12/31/2020 50,000
Income Summary 50,000
 75,000 User:
Entry made in December:
75,000 Purchases 75,000
AP 75,000

75,000 Entry that should have been made (correct):

75,000 NO ENTRY IN DECEMBER FOR BOTH PURCHASES AND
ENDING INVENTORY

Adjusting entry in December:

December January AP 75,000
Purchases 75,000
This month
YES - Incorrect
NO - Correct

30,000 User:
30,000 Entry made in December:
NO ENTRY MADE IN DECEMBER FOR BOTH PURCHASES
AND ENDING INVENTORY
30,000
30,000 Entry that should have been made (correct):
Purchases 30,000
AP 30,000

30,000 Inventory, 12/31/2020 30,000

Income Summary 30,000
30,000
Adjusting entry in December:
30,000 Purchases 30,000
30,000 AP 30,000

December January Inventory, 12/31/2020 30,000

Income Summary 30,000
This month
NO - Incorrect This month
NO - Incorrect

90,000 User:
This is assumed as recorded already as purchase return
90,000
because there is already the Receiving Report which is the
basis os recording the return.
 User:
This is assumed as recorded already as purchase return
because there is already the Receiving Report which is the
basis os recording the return.

30,000
User:
30,000 Entry made in December:
Acccounts Payable 90,000
Purchase Return 90,000
December January
Inventory, 12/31/2020 90,000
Income Summary 90,000
This month
YES - Correct
YES - Incorrect Entry that should have been made (correct):
Acccounts Payable 90,000
Purchase Return 90,000

Adjusting entry in December:

Income Summary 90,000
Inventory, 12/31/2020 90,000

140,000
140,000

User:
Entry made in December:
140,000
Inventory, 12/31/2020 140,000
140,000 Income Summary 140,000

December January
Entry that should have been made (correct)
This month Purchases 140,000
Accunts Payable 140,000
NO - Incorrect This month
YES - Correct Inventory, 12/31/2020 140,000
Income Summary 140,000

Adjusting entry
Purchases 140,000
Accounts Payable 140,000

December 31, 2021 (cut-off), state whether the

eason for each item.

Reason
The entity is the BUYER.
FOB Destination
Received on January 8, 2022:
▪ No purchases during 2021.
▪ Should not be included as Inventory at 12/31/2021
The entity is the CONSIGNEE.
It has no legal title or ownership to the goods received.
▪ No not be recorded as purchases of 2021.
▪ Should not be included as Inventory at 12/31/2021
The entity is the SELLER.
 The ownership still belongs to the seller.
▪ Should not be recorded as sales of 2021.
▪ Should be included as Inventory at 12/31/2021

The entity is the BUYER.

The ownership belongs to the buyer in 2021.

▪ Should be recorded as purchases of 2021.

▪ Should be included as Inventory at 12/31/2021

The entity is the SELLER.

Fabricated to order - finished and in the shipping room.
The ownership belongs to the buyer.
▪ Should be recorded as sales of 2021.
▪ Should be excluded from Inventory at 12/31/2021

he amount of P 2,000,000 before any corrections:

ry was computed:

150,000

200,000

300,000

400,000

Amount Explanation
2,000,000

- correctly excluded; consignee

Seller; FOB Destination; in transit
200,000 Owner is the seller on 12/31/2021
Buyer; FOB Shipping point; in transit
300,000 Owner is the buyer on 12/31/2021
Seller; FOB Shipping pointl in transit
-
Owner is the buyer on 12/31/2021
2,500,000

stments, inventory is valued at P

ated invoice was received and recorded

point.
shipping point. The goods were

tion was not included in the year end

ry 15, 2022. The sale was properly

on December 31, 2021. The related

eceived on January 5, 2022 and were

nation was recorded as a sale in 2021.

not included in 2021 ending inventory.

Amount Explanation
7,600,000

Buyer; FOB Shipping point

250,000 Shipped on 12/31/2021; in transit on 12/31/2021
Owner is the buyer on 12/31/2021
Seller; FOB Shipping point
Shipped on 12/31/2021; in transit on 12/31/201
(850,000)
Owner is the buyer on 12/31/2021
Incorrectly included in ending inventory by the seller
Seller; FOB Destination
Received by customer on 1/15/2022
260,000
Owner is the seller on 12/31/2021
Incorrectly excluded in ending inventory by the seller.
Buyer; FAS (free along side); in transit at 12/31/2021
Owner is the buyer on 12/31/2021
350,000
Incorrectly excluded in ending inventory by the buyer.

Seller; FOB Destination

Received by customer on 1/5/2022
840,000
Owner is the seller on 12/31/2021
Incorrectly excluded in ending inventory by the seller.
8,450,000

ing the goods TO THE DOCK next to or alongside the vessel on which the goods are to be
buyer when the carrier (cargo ship) takes possession of the goods.
s computation)
revealed the following initial amounts

the consignee, amounting to P 165,000,

e on December 31, 2021.
d in the last week of 2021 and
al count on December 31, 2020,
ers.
on December 28, 2021, amounted to P
o the customers for the parts were

ignment from Fancy Company, at their

he cost of goods was P 25,000. The

Inventory, Accounts
12/31/2021 Payable Net Sales Explanation
1,250,000 1,000,000 9,000,000
Consignee; No title of ownership
(165,000) (165,000) - Incorrectly included in inventory at 12/31/2021
Incorrectly included in Accounts Payable on 12/31/2021
Seller; Already on the loading dock; Already sold.
Owner is the buyer on 12/31/2021.
(20,000) - -
Correctly recorded as sales of 2021.
Incorrectly included in inventory of 12/31/2021.
Seller; FOB shipping point; shipped on 12/28/2021.
Owner is the buyer on 12/31/2021.
- - 40,000
Incorrecty recorded as January 2022 sales; should be in 2021
Correctly excluded in inventory at 12/31/2021 (in transit).
Consignor; With title of ownership to unsold inventories.
210,000 - -
Incorrectly excluded in inventory at 12/31/2021 (in retalers' store)
Buyer; FOB Shipping point; shipped on 12/29/2021 (in transit)
Owner is the buyer on 12/31/2021.
25,000 25,000 -
Incorrectly excluded in inventory at 12/31/2021 (in transit)
Incorrectly not recorded as credit purchases of 2021.
1,300,000 860,000 9,040,000
n

on 12/31/2021

12/28/2021.

es; should be in 2021

/2021 (in transit).
nsold inventories.
31/2021 (in retalers' store)
12/29/2021 (in transit)

31/2021 (in transit)

ases of 2021.
INTRODUCTORY DISCUSSION
Estimated selling price xxx Do not use or ignore normal selling price
Less: Estimated cost to complete xxx
Estimated cost to sell/disposal xxx xxx
Net Realizable Value xxx

DIY EXERCISE 3-3.7 (LCNRV)

INSTRUCTIONS: For each individual situation, compute or prepare the requirements of the problem.

SITUATION 1 (Determining LCNRV)

Prime Company manufactures and sells four products. The inventories of which are priced at cost
or net realizable value whichever is lower. A normal profit of 30% is usually maintained on each
product.

Cost to Estimated Normal

Product Original Cost Dispose Selling Price Selling Price
1 700 150 800 700
2 475 205 950 950
3 255 50 300 350
4 450 260 1,000 900

Required:
Determine the unit value for each product applying the LCNRV in measuring inventory.

NOTES:
Ignore normal selling price
Ignore normal profit rate or amount

SOLUTION:
NET REALIZABLE VALUE
Estimated Cost to NRV
Product Original Cost Selling Price Dispose (ESP - CTD) LCNRV
1 700 800 150 650 650 NRV
2 475 950 205 745 475 Cost
3 255 300 50 250 250 NRV
4 450 1,000 260 740 450 Cost

SITUATION 2 (Methods of Applying LCNRV)

Fruity Veggie Company carried five items in inventory. The following per unit data relate to these items at the
end of first year of operations.

Cost NRV
Frozen
. Pomelo 40,000 60,000
. Pineapple 50,000 55,000
. Mango 25,000 20,000
 Canned
. Mixed Fruits 45,000 36,000
. Mixed Vegetables 47,500 46,000

Required:
A. The LCNRV is applied to the individual inventory item.
B. The LCNRV is applied to the inventory major groups.
C. The LCNRV is applied to the total inventory.

SOLUTION:
LCNRV
Cost NRV Indiv. Items Major Grps. Total Invty.
Frozen
Pomelo 40,000 60,000 40,000
Pineapple 50,000 55,000 50,000
Mango 25,000 20,000 20,000
Total frozen 115,000 135,000 115,000

Canned
Mixed Fruits 45,000 36,000 36,000
Mixed Vegetables 47,500 46,000 46,000
Total canned goods 92,500 82,000 82,000

TOTAL 207,500 217,000

LCNRV 192,000 197,000 207,500

Cost 207,500 207,500 207,500

LCNRV 192,000 197,000 207,500
AJE/Loss 15,500 10,500 0

SITUATION 3 (Methods of Recording LCNRV)

Malone Company determined its ending inventory at cost and at LCNRV at December 31, 2019, December 31,
2020 and December 31, 2021, as shown below:

Cost NRV LCNRV

December 31, 2018 650,000 650,000
December 31, 2019 780,000 712,000 712,000 NRV
December 31, 2020 905,000 830,000 830,000 NRV
December 31, 2021 995,000 950,000 950,000 NRV

Instructions:
. Prepare the journal entries required at December 31, 2019, December 31, 2020, and December 31, 2021
using the Direct method and Allowance Method of adjusting to LCNRV, assuming that a periodic
inventory system is used.
. Prepare the journal entries required at December 31, 2019 and December 31, 2020, and December 31,
2021 using Direct method and Allowance Method of adjusting to LCNRV, assuming that a perpetual
inventory system is used.

SOLUTION:
. Journal Entries - Periodic Inventory System
 DIRECT METHOD
Date Transactions Account Names Debit
2019
Dec. 31 Cost - P 780,000 Inventory, 12/31/2019 (at NRV) 712,000
NRV - P 712,000 (lower) Income Summary

Statement of Financial Position

Current Assets:
Inventory (at NRV) 712,000

Statement of Comprehensive Income

Sales
Less: Cost of Sales (expense)
Inventory, beginning xxx
Add: Net Purchases xxx
Goods available for sale xxx
Less: Inventory, ending (at NRV) 712,000
Gross Profit
Less: Operating Expenses
Distribution costs xxx
Administrative costs xxx
Profit

2020
Dec. 31 Cost - P 905,000 Inventory, 12/31/2020(at NRV) 830,000
NRV - P 830,000 (lower) Income Summary

Statement of Financial Position

Current Assets:
Inventory (at NRV) 830,000
 Statement of Comprehensive Income
Sales
Less: Cost of Sales (expense)
Inventory, beginning xxx
Add: Net Purchases xxx
Goods available for sale xxx
Less: Inventory, ending (at NRV) 830,000
Gross Profit
Less: Operating Expenses
Distribution costs xxx
Administrative costs xxx
Profit

2021
Dec. 31 Cost - P 995,000 Inventory, 12/31/2021 (at NRV) 950,000
NRV - P 950,000 (lower) Income Summary

Statement of Financial Position

Current Assets:
Inventory (at NRV) 950,000

Statement of Comprehensive Income

Sales
Less: Cost of Sales (expense)
Inventory, beginning xxx
Add: Net Purchases xxx
Goods available for sale xxx
Less: Inventory, ending (at NRV) 950,000
Gross Profit
Less: Operating Expenses
Distribution costs xxx
Administrative costs xxx
Profit
. Journal Entries - Perpetual Inventory System

DIRECT METHOD
Date Transactions Account Names Debit
2019
Dec. 31 Cost - P 780,000 (GL bal.) Cost of Goods Sold (Expense) 68,000
NRV - P 712,000 (lower) Inventory

Notes - Inventory is a GL act.

Inventory, unadjusted balance 780,000
Less: Inventory writedown (credit) 68,000
Inventory, adjusted balance 712,000

Statement of Financial Position

Current Assets:
Inventory (at NRV) 712,000

2020
Dec. 31 Cost - P 905,000 (GL act.) Cost of Goods Sold 75,000
NRV - P 830,000 (lower) Inventory

Notes - Inventory is a GL act.

Inventory, unadjusted balance 905,000
Less: Inventory writedown (credit) 75,000
Inventory, adjusted balance 830,000

Statement of Financial Position

Current Assets:
Inventory (at NRV) 830,000
 2021
Dec. 31 Cost - P 995,000 (GL act.) Cost of Goods Sold 45,000
NRV - P 950,000 Inventory

Notes - Inventory is a GL act.

Inventory, unadjusted balance 995,000
Less: Inventory writedown (credit) 45,000
Inventory, adjusted balance 950,000

Statement of Financial Position

Current Assets:
Inventory (at NRV) 950,000
ignore normal selling price

the problem.

e to these items at the

 Per accounting books - acquired at cost
Subsequent measurement

1, 2019, December 31,

nd December 31, 2021

ming that a periodic

0, and December 31,

uming that a perpetual
User:
1) Record the inventory at cost after the physical
count - the amount to be set up.
2) recognize the gain or loss as a result of LCNRV
 User:
1) Record the inventory at cost after the physical
count - the amount to be set up.
2) recognize the gain or loss as a result of LCNRV

ALLOWANCE METHOD (Loss Method)

Credit Account Names Debit Credit
Allowance for IWD
Inventory, 12/31/2019 (at cost) 780,000 Debit
712,000 Income Summary 780,000

Loss on Inventory Write-down 68,000

Allowance for Inventory Write-down 68,000
(P 780,000 cost - P 712,000 NRV)

Statement of Financial Position

Current Assets:
Inventory (at cost) 780,000
Less: Allowance for Inventory Writedown 68,000
Net Realizable Value 712,000

Statement of Comprehensive Income

xxx Sales xxx
Less: Cost of Sales (expense)
Inventory, beginning xxx
Add: Net Purchases xxx
Goods available for sale xxx
xxx Less: Inventory, ending (at cost) 780,000
xxx Cost of sales before inventory writedown xxx
Add: Loss on Inventory writedown (expense) 68,000
Cost of sales after inventory writedown xxx
xxx Gross Profit xxx
xxx Less: Operating Expenses
Distribution costs xxx
Administrative costs xxx xxx
Profit xxx

Inventory, 12/31/2020 (at cost) 905,000 Allowance for IWD

830,000 Income Summary 905,000 Debit

Loss on Inventory Write-down 7,000

Allowance for Inventory Write-down 7,000

Computation:
Allowance for Inventory writedown, adjusted/required
(P 905,000 cost - P 830,000 NRV) 75,000
Less: Allowance for Inventory writedown, unadjusted 68,000
Provision for the year 2020 (ADDITIONAL LOSS) 7,000

Statement of Financial Position

Current Assets:
Inventory (at cost) 905,000
Less; Allowance for Inventory Writedown 75,000
Net Realizable Value 830,000
 Statement of Comprehensive Income
xxx Sales xxx
Less: Cost of Sales (expense)
Inventory, beginning xxx
Add: Net Purchases xxx
Goods available for sale xxx
xxx Less: Inventory, ending (at cost) 905,000
xxx Cost of sales before inventory writedwon xxx
Add: Loss on Inventory writedown (expense) 7,000
Cost of sales after inventory writedwon xxx
xxx Gross Profit xxx
xxx Less: Operating Expenses
Distribution costs xxx
Administrative costs xxx xxx
Profit xxx

Allowance for IWD

Inventory, 12/31/2021 (at cost) 995,000 Debit
950,000 Income Summary 995,000
30,000
Allowance for Inventory Write-down 30,000
Recovery in Net Realizable Value of Inventory 30,000

Computation:
Allowance for Inventory writedown, adjusted/required
(P 995,000 cost - P 950,000 NRV) 45,000
Less: Allowance for Inventory writedown, unadjusted 75,000
Recovery in NRV of inventory (decrease - GAIN) (30,000)

Statement of Financial Position

Current Assets:
Inventory (at cost) 995,000
Less: Allowance for Inventory Writedown 45,000
Net Realizable Value 950,000

Statement of Comprehensive Income

xxx Sales xxx
Less: Cost of Sales (expense)
Inventory, beginning xxx
Add: Net Purchases xxx
Goods available for sale xxx
xxx Less: Inventory, ending (at cost) 995,000
xxx Cost of sales before inventory recovery xxx
Less: Recovery in NRV of Inventory (GAIN/INC.) 30,000
Cost of sales after inventory recovery xxx
xxx Gross Profit xxx
xxx Less: Operating Expenses
Distribution costs xxx
Administrative costs xxx xxx
Profit xxx
 ALLOWANCE METHOD (Loss Method)
Credit Account Names Debit Credit
Allowance for IWD
Loss on Inventory Write-down 68,000 Debit
68,000 Allowance for Inventory Write-down 68,000
(P 780,000 cost - P 712,000 NRV)

Overstated
AJE
Corrected

Statement of Financial Position

Current Assets:
Inventory (already set up) 780,000
Less; Allowance for Inventory Writedown 68,000
Net Realizable Value 712,000

Statement of Comprehensive Income

Sales xxx
Less: Cost of Sales (expense) xxx
Add: Loss in Inventory Writedown (expense) 68,000 xxx
Gross Profit xxx
Less: Operating Expenses
Distribution costs xxx
Administrative costs xxx xxx
Profit xxx

Allowance for IWD

Loss on Inventory Write-down 7,000 Debit
75,000 Allowance for Inventory Write-down 7,000

Computation:
Overstated Allowance for Inventory writedown, adjusted
AJE (P 905,000 - P 830,000) 75,000
Corrected Less: Allowance for Inventory writedown, unadjusted 68,000
Provision for the year 2020 7,000

Statement of Financial Position

Current Assets:
Inventory (already set up) 905,000
Less; Allowance for Inventory Writedown 75,000
Net Realizable Value 830,000

Statement of Comprehensive Income

Sales xxx
Less: Cost of Sales (expense) xxx
Add: Loss in Inventory Writedown (Expense) 7,000 xxx
Gross Profit xxx
 Less: Operating Expenses
Distribution costs xxx
Administrative costs xxx xxx
Profit xxx

Allowance for IWD

Allowance for Inventory Write-down 30,000 Debit
45,000 Recovery in Net Realizable Value of Inventory 30,000
30,000
Computation:
Overstated Allowance for Inventory writedown, adjusted
AJE (P 995,000 - P 950,000) 45,000
Corrected Less: Allowance for Inventory writedown, unadjusted 75,000
Recovery in NRV of inventory (GAIN) (30,000)

Statement of Financial Position

Current Assets:
Inventory (already set-up) 995,000
Less; Allowance for Inventory Writedown 45,000
Net Realizable Value 950,000

Statement of Comprehensive Income

Sales xxx
Less: Cost of Sales (expense) xxx
Less: Recovery in NRV of Inventory (Income) 30,000 xxx
Gross Profit xxx
Less: Operating Expenses
Distribution costs xxx
Administrative costs xxx xxx
Profit xxx
Allowance for IWD
Credit
68,000 Provision for 2019/ending bal.

Allowance for IWD

Credit
68,000 1/1/2020 balance
7,000 Provision for 2020

75,000 12/31/2020 balance

Allowance for IWD
Credit
75,000 1/1/2021 balance
Recovery in NRV of Inventory

45,000 12/31/2021 balance

Allowance for IWD
Credit
68,000 Provision for 2019/ending bal.

Allowance for IWD

Credit
68,000 1/1/2020 balance
7,000 Provision for 2020

75,000 12/31/2020 balance

Allowance for IWD
Credit
75,000 1/1/2021 balance
Recovery in NRV of Inventory

45,000 12/31/2021 balance

DIY EXERCISE 3-3.8 (Purchase Commitments)

SITUATION (Journal Entries)

On December 31, 2021, Naysaver Company has outstanding purchase commitments for 10,000 gallons at
raw material to be used in the manufacturing process.

Required:
Prepare the journal entries under each of the following assumptions:
A. The market price on December 31, 2021 is P 210.
B. It is expected that the market price will decline to P 170 in early January 2022.
C. The market price on December 31, 2021 is P 170.
D. The market price on December 31, 2021 is P 170. On January 31, 2022 when 10,000 gallons shipment is received,
market price is P 150.
E. The market price on December 31, 2021 is P 170. On January 31, 2022 when the 10,000 gallons shipment is receiv
market price is P 210.

SOLUTION:

No. Independent Assumptions Account Names

A. The market price on December 31, 2021 NO ENTRY

is P 210. Increase in market price is not recognized.
This is gain only once sold.

B. It is expected that the market price will NO ENTRY

decline to P 170 in early January 2022. The decline in market price is only an expectation.
Today is 12/31/2021 and not yet January, 2022.

C. The market price on December 31, 2021 Loss on Purchase Commitment

is P 170. Estimated Liability on Purchase Commitment
(P 200 - P 170) x 10,000 gallons

D. The market price on December 31, 2021 Loss on Purchase Commitment

is P 170. On January 31, 2022 when Estimated Liability on Purchase Commitment
10,000 gallons shipment is received, the (P 200 - P 170) x 10,000 gallons
market price is P 150.
Loss on Purchase Commitment*
Estimated Liability on Purchase Commitment,
Purchases (10,000 gal. x P 150 Market price)
Accounts Payable** (fixed price)

*(P 170-P 150) x 10,000 gal.

** 10,000 gal, x P 200 contract price

E. The market price on December 31, 2021 Loss on Purchase Commitment

is P 170. On January 31, 2022 when the Estimated Liability on Purchase Commitment
10,000 gallons shipment is received, the (P 200 - P 170) x 10,000 gallons
market price is P 210.
Estimated Liability for Purchase Commitment
Purchases (fixed price)
Accounts Payable** (fixed price)
Gain on Purchase Commitment*

*(P 201 - P 170) x 10,000 gallons (GAIN)

RECOVERY is to the extent only of P 300,000 loss

If at the time of delivery, the purchase price increases and exceeds t

(agreed price), the increase is recognized as GAIN ON PURCHASE CO
which shall be offset to the extent of amount of LOSS ON PURCHA
PREVIOUSLY RECORDED.
0,000 gallons at P 200 per gallon of

0 gallons shipment is received, the

,000 gallons shipment is received, the

Debit Credit

Not yet purchased and sold to

recognize GAIN.

Only an expectation and not an actual

transaction.

300,000 Only loss is recognized and not expected gain or

300,000 gain at year end, because of the principle of
CONSERVATISM (report realistic figure).

300,000
12/31/2019
300,000

200,000
300,000
1/31/2020
1,500,000
2,000,000

300,000
300,000 12/31/2019

300,000 MV PC
2,000,000 210 200 1/31/2020
1/31/2020
2,000,000 170 170 12/31/2019
 1/31/2020
300,000 40 30 Recovery

300,000 loss

e price increases and exceeds the fixed price

zed as GAIN ON PURCHASE COMMITMENT
f amount of LOSS ON PURCHASE COMMITMENT
DIY EXERCISE 3-3.9 (Estimating Inventories using the Gross Profit Method)
INSTRUCTIONS: For each individual situation, compute or prepare the requirements of the problem.

SITUATION 1 (Computing Estimated Inventories - Timeliness)

Fiesta Company uses the gross profit method to estimate inventory for monthly reporting purposes. Presented below is
information for the month of May.

Inventory, May 1 320,000

Purchases (gross) 1,280,000
Freight-in 60,000
Sales 2,000,000
Sales Returns 140,000
Purchase Discounts 24,000

Instructions:
. Compute the estimated inventory at May 31, assuming that the gross profit rate is 25% of sales.
. Compute the estimated inventory at May 31, assuming that the gross profit rate is 25% of cost.

SOLUTION:
.
Computation of the estimated inventory at May 31, assuming that the gross profit rate is 25% of sales.

Solution:
Inventory, May 1 320,000
Purchases (gross) 1,280,000
Purchase Discounts (24,000)
Freight-in 60,000
Goods available for sale 1,636,000
Less: Cost of Sales
Sales 2,000,000
Less: Sales Returns 140,000
Net Sales 1,860,000
Multiply by cost rate (100% - 25% GPR) 75% 1,395,000
Estimated inventory at May 31 241,000

.
Computation of the estimated inventory at May 31, assuming that the gross profit rate is 25% of cost.

Solution:
Inventory, May 1 320,000
Purchases (gross) 1,280,000
Purchase Discounts (24,000)
Freight-in 60,000
Goods available for sale 1,636,000
Less: Cost of Sales
Sales 2,000,000
Less: Sales Returns 140,000
Net Sales 1,860,000
Divide by sales rate of 125% 125% 1,488,000 Gross Profit Method (based on cost
Estimated inventory at May 31 148,000
SITUATION 2 (Construction of Accounts Related to inventories - Timeliness)
Aloha Company prepares monthly income statements. A physical inventory is taken only at year end; hence, month-end
inventories must be estimated. All sales are made on account. The rate of mark-up on cost is 50% (based on cost). The
following information relates to the month of June 2021:
User:
Accounts receivable, June 1, 2021 100,000 If this is missing, this can be compu
Accounts receivable, June 30, 2021 150,000 Accounts Payable.
Collection of accounts receivable during June 2021 250,000
Inventory, June 1, 2021 180,000 Apply workback procedures using T-
Purchases of inventory during June 2021 160,000
Accounts Payable, end xxx
Payment of accounts xxx D
Required: Purchase returns and allow. xxx
Compute the estimated cost of the June 30, 2021 inventory. Accounts Payable, beg. (xxx)
Credit purchases xxx
SOLUTION:
Accounts Receivable
Debit Credit
Accounts receivable, June 1, 2021 100,000 100,000
Credit sales during June 2021 (squeeze amt.) ? 300,000
Collection of accounts receivable during June 2021 250,000 250,000

Accounts receivable, June 30, 2021 150,000 150,000

Inventory, June 1, 2021 180,000

Add: Purchases of inventory during June 2021 160,000
Cost of goods available for sale 340,000
Less: Cost of sales
Accounts Receivable, June 30, 2021 150,000
Collection of AR during June, 2021 250,000
Accounts Receivable, June 1, 2021 (100,000)
Sales during June 300,000
Divide by sales rate (based on cost) 150% 200,000
Cost of Estimated Inventory, June 30, 2021 140,000

SITUATION 3 (Construction of Accounts Related to Compute Inventory Shortage)

Karen Company reported the following information for the current year:

Beginning inventory 5,000,000

Purchases 26,000,000
Freight-in 2,000,000
Purchase returns and allowances 3,500,000
Purchase discounts 1,500,000
Sales 40,000,000
Sales returns 3,000,000
Sales allowances 500,000
Sales discounts 1,000,000
A physical inventory taken at year-end resulted in an ending inventory costing P 4,000,000.

At year-end, unsold goods out on consignment (WE ARE CONSIGNOR) with selling price of P 1,000,000 are in the
hands of a consignee.

The gross profit was 40% on sales. (BASED ON SALES)

QUESTIONS:
. What is the cost of goods available for sale?
. What is the cost of goods sold?
. What is the estimated cost of inventory shortage?

SOLUTION:
. What is the cost of goods available for sale?

Solution:
Beginning inventory 5,000,000
Purchases 26,000,000
Freight-in 2,000,000
Purchase returns and allowances (3,500,000)
Purchase discounts (1,500,000)
Cost of Goods Available for Sale 28,000,000 included also here are goods out on consignment

. What is the cost of goods sold?

Solution:
Sales 40,000,000
Less: Sales returns 3,000,000 IGNORE Sales allowances and sales discount
Net Sales 37,000,000
Multiply by cost rate (GP based on sales) 60% (100% Sales rate - 40% GP Rate)
Cost of Goods Sold 22,200,000

. What is the estimated cost of inventory shortage?

Solution:
Cost of goods available for sale (No. 1) 28,000,000
Less: Cost of goods sold (No. 2) 22,200,000
Estimated Inventory, end, with goods out on consignment, per record 5,800,000
Less: Goods out on consignment, at cost
(P 1,000,000 sales price x 60% cost rate) 600,000
Estimated Inventory, end, without goods out on consignment 5,200,000
Less: Inventory ending per count 4,000,000
Inventory Shortage 1,200,000
User:
IF THE PROBLEM IS SILEN
counted. It means invento
stores and displays. Items
in transit are not included

SITUATION 4 (Construction of Accounts Related to Compute Inventory Fire Loss)

On the night of September 30, 2020, a fire destroyed most of the merchandise inventory of Paragon Company. All goods
completely destroyed except for partially damaged goods that normally sell for P 100,000 and that had an estimated
realizable value of P 25,000 and undamaged goods that normally sell for P 60,000 (normal selling price).

Inventory, January 1, 2020

Net purchases, January 1 through September 30, 2020
Net sales, January 1 through September 30, 2020

2019 2018
Net Sales 5,000,000 3,000,000
Cost of goods sold 3,840,000 2,200,000

QUESTIONS:
1) Compute the amount of fire loss to be recognized on September 30, 2020
2) Compute the amount of fire loss to be recognized on September 30, 2020 assuming the scrap materials damaged by
(or inventory partly damaged by fire) were sold P 20,000.
3) Compute the amount of fire loss to be recognized on September 30, 2020 assuming that inventories purchased for P
500,000 are in transit during the fire but included in the physical count at September 30, 2020.

SOLUTION TO QUESTION 1:
Compute the amount of fire loss to be recognized on September 30, 2020

Inventory, January 1, 2020

Net purchases, January 1 through September 30, 2020
Cost of goods available for sale, 1/1 to 9/30/2020
Less: Cost of sales, January 1 to 9/30/2020
Net Sales, January 1 through September 30, 2020 5,600,000
Multiply by cost rate (based on sales) 75%
Estimated inventory on date fire, September 30, 2020, at cost, per record
Less: Undamaged goods (not counted as fire loss), at cost
(P 60,000 normal selling price x 75% cost rate) 45,000
Partially damaged goods (not included as fire loss) at NRV 25,000
Fire Loss at September 30, 2020, date of fire

Supporting computation for cost rate based on previous accounting records (past experience)

2019 2018 2017

Net Sales 100% 5,000,000 3,000,000 1,000,000
Cost of goods sold 3,840,000 2,200,000 710,000
Cost rate (BASED ON SALES)

Cost rate = COGS / Net Sales = P 6,750,000/P 9,000,000 = 75%

Based on sales - if problem is silent

SOLUTION TO QUESTION 2:
Compute the amount of fire loss to be recognized on September 30, 2020 assuming the scrap
materials damaged by fire (or inventory partly damaged by fire) were sold P 20,000.

Inventory, January 1, 2020

Net purchases, January 1 through September 30, 2020
Cost of goods available for sale, 1/1 to 9/30/2020
Less: Cost of sales, January 1 to 9/30/2020
Net Sales, January 1 through September 30, 2020 5,600,000
Multiply by cost rate (based on sales) 75%
Estimated inventory on date fire, September 30, 2020, at cost
Less: Undamaged goods (not counted as fire loss), at cost
(P 60,000 normal selling proce x 75% cost rate) 45,000
Partially damaged goods (not included as fire loss) at NRV 25,000
Fire Loss at September 30, 2020, date of fire, unadjusted
Less: Proceeds from sale of scrap materials (other income)
Fire Loss at September 30, 2020, date of fire, adjusted

SOLUTION TO QUESTION 3:
Compute the amount of fire loss to be recognized on September 30, 2020 assuming that inventories
purchased for P 500,000 are in transit (included in Purchases amount) during the fire date of
September 30, 2020. The scrap materials damaged by fire (or inventory partly damaged by fire)
were sold P 20,000.

Inventory, January 1, 2020

Net purchases, January 1 through September 30, 2020
Cost of goods available for sale, 1/1 to 9/30/2020
Less: Cost of sales, January 1 to 9/30/2020
Net Sales, January 1 through September 30, 2020 5,600,000
Multiply by cost rate (based on sales) 75%
Estimated inventory on date fire, September 30, 2020, at cost
Less: Undamaged goods (not counted as fire loss), at cost
(P 60,000 normal selling proce x 75% cost rate) 45,000
Partially damaged goods (not included as fire loss) at NRV 25,000
Goods in transit recorded as purchases 500,000
Fire Loss at September 30, 2020, date of fire, unadjusted
Less: Proceeds from sale of scrap materials (other income)
Fire Loss at September 30, 2020, date of fire, adjusted
 Gross Profit Method)
the problem.

ng purposes. Presented below is

s 25% of sales.
s 25% of cost.

ross profit rate is 25% of sales.

at cost
at cost
at cost
at cost
consists of sold (COGS) and unsold (EI)

Gross Profit Method (based on sales)

ross profit rate is 25% of cost.

oss Profit Method (based on cost)

- Timeliness)
y at year end; hence, month-end
cost is 50% (based on cost). The

User:
If this is missing, this can be computed using the
Accounts Payable.

Apply workback procedures using T-account.

Accounts Payable, end xxx Cr.

Payment of accounts xxx Dr.
Purchase returns and allow. xxx Dr.
Accounts Payable, beg. (xxx) Cr.
Credit purchases xxx Cr.

ventory Shortage)
ng price of P 1,000,000 are in the

re are goods out on consignment at cost

wances and sales discount

40% GP Rate)

included also here are goods out on consignment at cost

included also here are goods out on consignment at cost

this is not included in the physicssl count

correct inventory per record (should be) during the count

User:
IF THE PROBLEM IS SILENT, only inventory items on hand are
counted. It means inventories in your location like warehouse,
stores and displays. Items not on hand like on consignment and
in transit are not included in the count.

ventory Fire Loss)

ntory of Paragon Company. All goods were
00,000 and that had an estimated net
00 (normal selling price).

660,000
4,240,000
5,600,000

2017
1,000,000
710,000

ng the scrap materials damaged by fire

ng that inventories purchased for P

mber 30, 2020.

660,000
4,240,000
4,900,000

4,200,000
700,000

70,000
630,000

(past experience)

Total
9,000,000
6,750,000
75%

suming the scrap

20,000.

660,000
4,240,000
 4,900,000

4,200,000
700,000

70,000
630,000
20,000 Cash receipts
610,000

suming that inventories

g the fire date of
ly damaged by fire)

660,000
4,240,000
4,900,000

4,200,000
700,000

570,000
130,000
20,000
110,000
DIY EXERCISE 3-3.9 (Estimating Inventories Using the Retail Inventory Met
INSTRUCTIONS: For each individual situation, compute or prepare the requirements of the problem.

SITUATION 1 (Conservative Approach and Average Cost Approach)

Empress Company used the retail inventory method to approximate the ending inventory.

The following information is available for the current year:

User:
Cost Retail
Cost + Profit = selling price or retail p
Beginning Inventory 650,000 1,200,000
GOODS AVAILABLE

Purchases 9,000,000 14,700,000 Profit also means mark-up

Freight-in 200,000 Profit here means original mark-up or
FOR SALE

Purchase returns 300,000 500,000

Purchase Allowances 150,000
Departmental transfer-in 200,000 300,000
Net markup 300,000 (AMU - MUC)
Net markdown 1,000,000 (MD - MDC)

Sales 9,500,000
Sales Discounts 100,000
SALES

Employee Discounts 500,000 add back to sales

Estimated normal shoplifting losses 600,000
Estimated normal shrinkage 400,000

Instructions:
. Compute the estimated cost of ending inventory using the conservative approach
. Compute the estimated cost of ending inventory using the average cost approach

SOLUTION:

Conservative Approach Average Cost Approach

Cost Retail Cost

Beginning inventory 650,000 1,200,000 650,000

Purchases 9,000,000 14,700,000 9,000,000

Freight-in 200,000 200,000
Purchase Returns (300,000) (500,000) (300,000)
Purchase Allowances (150,000) (150,000)
Departmental transfer-in 200,000 300,000 200,000
Net markup 300,000
Goods available for sale 9,600,000 16,000,000
COST RATE – Conservative
- GAFS at cost/GAFS at retail
P 9,600,000/P 16,000,000 = 60%

Net markdown (1,000,000)

Goods available for sale 9,600,000 15,000,000 9,600,000
COST RATE – Average
P 9,600,000/P 15,000,000 = 64%
Less: Sales (AT RETAIL PRICE) 9,500,000 9,500,000
Employee Discount 500,000 500,000
Estimated normal shoplifting losses 600,000 600,000
Estimated normal shrinkage 400,000 11,000,000 400,000
Ending inventory at retail price 4,000,000

ENDING INVENTORY AT COST:

Conservative (P 4,000,000 x 60%) 2,400,000
Average (P 4,000,000 x 64%) 2,560,000

SITUATION 2 (FIFO RETAIL APPROACH)

Flame Company adopted the FIFO approach of inventory pricing in connection with the use of the retail inventory
method. The retail records showed the following:

Cost Retail
Year 2020:
Beginning inventory 556,800 928,000
Purchases 4,576,000 7,028,000
Net markup 42,000
Net markdown 30,000
Sales 6,840,000

Year 2021:
Purchases 4,760,000 6,812,000
Net markup 56,000
Net markdown 68,000
Sales 6,928,000

Required:
Determine the estimated cost of inventory on December 31, 2020 and 2021 applying the FIFO retail approach.

SOLUTION:

Cost Retail Cost %

YEAR 2020
Inventory, January 1, beginning 556,800 928,000 60%

Purchases 4,576,000 7,028,000

Net markup 42,000
Net markdown (30,000)
Total or Net Purchases 4,576,000 7,040,000 65%

Goods available for sale 5,132,800 7,968,000

Less: Sales 6,840,000
Ending inventory, at retail price 1,128,000

ENDING INVENTORY AT COST:

FIFO (P 1,128,000 x 65%) 733,200
 Cost Retail
YEAR 2021
Inventory, January 1, beginning 733,200 1,128,000 65%

Purchases 4,760,000 6,812,000

Net markup 56,000
Net markdown (68,000)
Total or Net Purchases 4,760,000 6,800,000 70%

Goods available for sale 5,493,200 7,928,000

Less: Sales 6,928,000
Ending inventory, at retail price 1,000,000

ENDING INVENTORY AT COST:

FIFO (P 1,000,000 x 70%) 700,000
tail Inventory Method)

Profit = selling price or retail price

also means mark-up

here means original mark-up or initial mark-up.

User:
Employee Discount puhunan sa binenta
COST % COS
100 60% 60 Correct
10 Employee Discount
90 60% 54 Wrong

verage Cost Approach

Retail

1,200,000

14,700,000

(500,000)

300,000
300,000

(1,000,000)
15,000,000 AFS = SOLD AND UNSOLD at selling price
 11,000,000 SOLD at selling price
4,000,000 UNSOLD at selling price

e of the retail inventory

IFO retail approach.

FIFO - Cost of Sales

FIFO - Ending Inventory and Cost of Sales

MCQ 1
Luminous Company provided the following information at current year-end:

Finished goods in storeroom, at cost including overhead of P 400,000 2,000,000

Finished goods in transit, including freight charge of P 20,000, FOB shipping point 250,000
Finished goods held by salesmen, at selling price, cost, P 100,000 140,000
Goods in process, at cost of materials and direct labor, 80% of production costs 720,000
Materials 1,000,000
Materials in transit, FOB Destination 50,000
Defective materials returned to suppliers for replacement 100,000
Shipping supplies 20,000
Gasoline and oil for testing finished goods 110,000
Machine lubricants 60,000

What is the correct amount of inventory at current year-end?

A. P 4,170,000
B. P 4,270,000
C. P 4,090,000
D. P 3,990,000

SOLUTION:

ITEMS Amount Included EXPLANATION

Finished goods in storeroom, at cost including 2,000,000 2,000,000
overhead of P 400,000
Finished goods in transit, including freight 250,000 - Seller. Reached already the shipping point. Title to
charge of P 20,000, FOB shipping point goods transferred to buyer.
Finished goods held by salesmen, at selling 140,000 100,000
price, cost, P 100,000 Still with the salesmen. No sales yet. AT COST.
Goods in process, at cost of materials and 720,000 900,000 Total Purchase Cost = P 720,000 / 80%
direct labor, 80% of production costs
Materials 1,000,000 1,000,000
Materials in transit, FOB Destination 50,000 - Buyer. In transit. The title to the goods still with the
seller.
Defective materials returned to suppliers for 100,000 100,000 Buyer. For replacement.
replacement
Shipping supplies 20,000 - Supplies; Prepaid expense
Gasoline and oil for testing finished goods 110,000 110,000 Factory supplies (unused)
Machine lubricants 60,000 60,000 Factory supplies (unused)
Correct inventory at current year-end 4,270,000

MCQ 2
Morgan Manufacturing Company has the following account balances at year end:

Office supplies 4,000

Raw materials 27,000
Work-in-process 59,000
Finished goods 72,000
Prepaid insurance 6,000

What amount should Morgan report as inventories in its statement of financial position?
A. P 72,000.
B. P 76,000.
C. P 158,000.
D. P 162,000

SOLUTION:
 Amount Explanation
Office supplies - Prepayment
Raw materials 27,000
Work-in-process 59,000
Finished goods 72,000
Prepaid insurance - Prepayment
Total inventories in SFP 158,000

MCQ 3:
Xylen Company purchased inventory for cash. The details thereof were as follows:

Invoice price (no VAT is charged on these goods) 850,000

Rebate offered to the entity by the supplier 10,000

Assuming the terms of the agreement made it clear that the rebate was a reduction to the invoice price of the
inventory, what is the total amount of inventoriable cost?
A. P 860,000
B. P 840,000
C. P 850,000
D. P 10,000

SOLUTION:
Inventoriable cost = P 850,000 invoice price – P 10,000 rebates = P 840,000

MCQ 4

Kindness Company regularly buys sweater and is allowed a trade discount of 20% and 10%. The entity made a purchase on
March 20 and received an invoice with a list price of P 900,000, a freight charge of P 50,000, and payment terms of net 30 days.

What is the cost of the purchase?

A. P 648,000
B. P 630,000
C. P 698,000
D. P 680,000

SOLUTION:
Invoice Price (P 900,000 x 80% x 90%) 648,000
Freight charge 50,000
Cost of purchase 698,000

Notes:
If the problem is silent, purchase of inventory is at gross method.

MCQ 5
On June 1, 2020, Compassion Company sold merchandise with a list price of P 1,000,000 to a customer.

The entity allowed trade discounts of 20% and 10%. Credit terms were 5/10, n/30 and the sale was made FOB shipping point.

The entity prepaid P 50,000 of delivery cost for the customer as an accommodation. The customer paid in full on June 11, 2020.

What amount is received from the customer as full remittance?

A. P 684,000
B. P 734,000
C. P 720,000
D. P 770,000

SOLUTION:
Invoice price (P 1,000,000 x 80% x 90%) 720,000
Less: Sales Discount (P 720,000 x 5%) 36,000
Net collection from invoice price 684,000
Add: Freight charges (freight prepaid term) 50,000
Amount received from customer as full remittance 734,000

Notes:
In FOB shipping point, freight charges will be paid by the buyer. In this problem, Compassion Company is the buyer. The term
"accommodation" in relation ot payment of freight charges only means the freight-term is freight prepaid wherein the freight charge
on the goods shipped is already paid by the seller but freigh charges will be recorded by the buyer. Therefore, the seller will collect
the freight charges from the buyer.

MCQ 6
Morgan Manufacturing Company has the following account balances at year end:

Office supplies 4,000

Raw materials 27,000
Work-in-process 59,000
Finished goods 72,000
Prepaid insurance 6,000

What amount should Morgan report as inventories in its statement of financial position?
A. P 72,000
B. P 76,000
C. P 158,000
D. P 162,000

SOLUTION:
Raw materials 27,000
Work-in-process 59,000
Finished goods 72,000
Inventories in SFP 158,000

MCQ 7
The following information applied to Fenn, Inc. for 2020:

Merchandise purchased for resale 400,000

Freight-in 10,000
Freight-out 5,000
Purchase returns 2,000

Fenn's 2000 inventoriable cost was:

A. P 400,000
B. P 403,000
C. P 408,000
D. P 413,000

SOLUTION:
Merchandise purchased for resale 400,000
Freight-in 10,000
Purchase returns -2,000
Inventoriable cost 408,000

MCQ 8
On December 28, 2020, Kerr Company purchased goods costing P 50,000. 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 1,000

Shipping 1,500
Special handling charges 2,500

These goods were received on December 31, 2000.

In the December 31, 2020 statement of financial position, what amount of cost for these goods should be included in
inventory?
A. P 54,500
B. P 53,500
C. P 52,000
D. P 50,000

SOLUTION:
Purchase cost 50,000
Packaging for shipment -
Shipping -
Special handling charges -
Total costs included in 12/31/2020 inventory 50,000

Explanation:
When the shipping therms are FOB Destination, the seller is responsible for costs incurred in transporting the goods
to the buyer, such as packaging costs, shipping costs and special handling charges. The only amount to be included
in the buyer's inventory cost is the purchase price.

MCQ 9
The following items were included in Opal Company's inventory account at December 31, 2020:

Merchandise out on consignment, at sales price,

including 40% mark-up on selling price. 40,000
Goods purchased, in transit, shipped FOB shipping point 36,000
Goods held on consignment by Opal 27,000

By what amount should Opal's inventory account at December 31, 2020 be reduced?
A. P 103,000
B. P 67,000
C. P 51,000
D. P 43,000

SOLUTION: Unadjusted Adjusted Decrease

Merchandise out on consignment, at sales price,
including 40% mark-up on selling price. (P 40,000 x 60%) 40,000 24,000 16,000
Goods purchased, in transit, shipped FOB shipping point 36,000 36,000 0
Goods held on consignment by Opal 27,000 0 27,000
Decrease in Opal's 12/31/2020 inventory 43,000

MCQ 10
Stone Company had the following consignment transactions during December 2000:

Inventory shipped on consignment to Beta Company 180,000

Freight paid by Stone 9,000
Inventory received on consignment from Alpha Company 120,000
Freight paid by Alpha 5,000
No sales of consigned goods were made through December 31, 2000. Stone's Decembe 31, 2000, statement of
financial position should include consigned inventory at
A. P 120,000
B. P 125,000
C. P 180,000
D. P 189,000

SOLUTION:
Inventory shipped on consignment to Beta Company 180,000
Freight paid by Stone 9,000
Inventory received on consignment from Alpha Company - Owned by Alpha
Freight paid by Alpha - Owned by Alpha
Consigned inventory included in 12/31/2020 SFP 189,000
ATION

shipping point. Title to

ales yet. AT COST.

0,000 / 80%

he goods still with the

made a purchase on
nt terms of net 30 days.

e FOB shipping point.

n full on June 11, 2020.

s the buyer. The term
wherein the freight charge
efore, the seller will collect
MCQ 1
Elkins Corporation uses the perpetual inventory method. On March 1, it purchased P10,000 of
inventory, terms 2/10, n/30. On March 3, Elkins returned goods that cost P1,000. On March 9,
Elkins paid the supplier.

On March 9, Elkins should credit

A. Purchase discounts for P 200
B. Inventory for P 200
C. Purchase discounts for P 180
D. Inventory for P 180

SOLUTION:
Purchases on March 1 10,000
Less: Purchase returns on March 3 1,000
Amount dueon March 9 within the discount period 9,000
Less: Purchase discount (P 9,000 x 2%) 180
Cash payment made on March 9 8,820

Related Journal Entry:

Accounts Payable 9,000
Inventory 180
Cash 8,820

MCQ 2
Presented is the information related to Bedding Ltd. For the month of January 2020.

Ending inventory, per perpetual records 237,600

Ending inventory actually on hand 231,000
Cost of Sales 2,288,000
Freight-out 77,000
Insurance expense 132,000
Rent expense 220,000
Salary expense 671,000
Sales discounts 110,000
Sale returns and allowances 143,000
Sales 3,850,000

QUESTIONS:
. How much is the inventory shortage/overage?
A. Cannot be determined from the given information
B. P 0
C. P 6,600 shortage
D. P 6,600 overage

SOLUTION:
Ending inventory, per perpetual records - OV 237,600
Less: Ending inventory actually on hand 231,000
Inventory shortage 6,600

. What is the cost of sales to be reported in the statement of comprehensive income?

 A. P 2,288,000
B. P 2,371,600
C. P 2,281,400
D. P 2,294,600

SOLUTION:
Cost of sales before adjustment to shortage 2,288,000
Add: Inventory shortage 6,600
Cost of sales to be reported in SCI 2,294,600

MCQ 3
Winsor Co. records purchases at net amounts. On May 5 Winsor purchased merchandise on
account, P 16,000, terms 2/10, n/30. Winsor returned P 1,200 of the May 5 purchase and received
credit on account. At May 31 the balance had not been paid.

Question 1:
The amount to be recorded as a purchase return is
A. P 1,080
B. P 1,224
C. P 1,200
D. P 1,176

SOLUTION:
Purchase return at net amount = P 1,200 x 98% = P 1,176

Question 2:
By how much the account payable be adjusted on May 31?
A. P 0
B. P 344
C. P 320
D. P 296

SOLUTION:
Unadjusted Accounts Payable, May 31 Net Gross
(P 16,000 x 98%) 15,680 16,000
Less: Purchase return (at net) - see (1) 1,176 1,200
Adjusted Accounts Payable, May 31, NET 14,504 14,800
Adjusted Accounts Payable, May 31, GROSS 14,800
The amount the AP be adjusted, May 31 -296

MCQ 4
Elkins Corporation uses the perpetual inventory method. On March 1, it purchased P10,000 of
inventory, terms 2/10, n/30. On March 3, Elkins returned goods that cost P 1,000. On March 9,
Elkins paid the supplier. On March 9, Elkins should credit
A. purchase discounts for P 200.
B. inventory for P 200.
C. purchase discounts for P 180.
D. inventory for P 180.
SOLUTION:
Purchases on 3/1 10,000
Less: Purchase returns on 3/3 1,000
Net Purchases 9,000
Less: Purchase discount (P 9,000 x 2%) 180
Cash payment on 3/9 8,820

Journal Entry:
Accounts Payable 9,000
Inventory 180
Cash 8,820

MCQ 5
On January 2, 2020, Nonchie Company purchased inventory on account costing P 100,000. The
term of the purchase is 20, 2/10, n/30.

Case No. 1: Assume that Nonchie uses the gross method, determine the following:
. The amount to be debited to purchases on January 2, 2020 is:
A. P 100,000
B. P 80,000
C. P 78,400
D. P 98,000

SOLUTION:
Debit to Purchases account = P 100,000 x 80% = P 80,000

. The total amount paid assuming the purchase was settled on January 12, 2020 is:
A. P 100,000
B. P 80,000
C. P 78,400
D. P 98,000

SOLUTION:
Amount paid on 1/12/2020 = P 80,000 x 98% = P 78,400

. The amount to be credited to Purchase Discount assuming the purchase was settled on
January 12, 2020 is:
A. NIL
B. P 20,000
C. P 2,000
D. P 1,600

SOLUTION:
Credit to Purchase Discount = P 80,000 x 2% = P 1,600

. The amount to be debited to Purchase Discount Lost assuming the purchase was settled on
January 14, 2020 is:
A. NIL
B. P 20,000
C. P 2,000
D. P 1,600
 SOLUTION:
Debit to Purchase Discount Lost = ZERO or NIL

Case No. 2: Assume that Nonchie uses the net method, determine the following:
. The amount to be debited to purchases on January 2, 2020 is:
A. P 100,000
B. P 80,000
C. P 78,400
D. P 98,000

SOLUTION:
Debit to Purchases account = P 100,000 x 80% x 98% = P 78,400

. The total amount paid assuming the purchase was settled on January 12, 2020 is:
A. P 100,000
B. P 80,000
C. P 78,400
D. P 98,000

SOLUTION:
Amount paid on 1/12/2020 = P 78,400

. The amount to be credited to Purchase Discount assuming the purchase was settled on
January 12, 2020 is:
A. NIL
B. P 20,000
C. P 2,000
D. P 1,600

SOLUTION:
Credit to Purchase Discount = ZERO or NIL

. The amount to be debited to Purchase Discount Lost assuming the purchase was settled on
January 14, 2020 is:
A. NIL
B. P 20,000
C. P 2,000
D. P 1,600

SOLUTION:
Debit to Purchase Discount Lost = P 80,000 x 2% = P 1,600

MCQ 6
On December 31, 2020, Alt Department Syore received 505 sweaters on consigment from Todd.
Todd's cost for the sweaters was P 80 each, and they were priced to sell at P 100. Alt's commission
on consigned goods is 10%. At December 31, 2020, 5 sweaters were remained. In its December
31, 2020 statement of financial position, what amount should Alt report as Accounts Payable for
consigned goods?
A. P 49,000
B. P 45,400
C. P 45,000
D. P 40,000

SOLUTION:
Sweaters sold:
500 sweaters x P 100 unit selling price 50,000
Less: Commission income
(P 50,000 x 10%) 5,000
Accounts Payable for consigned goods 45,000

Related journal entry:

Cash 50,000
Commission Income 5,000
Accounts Payable - Consignor 5,000

MCQ 7
On October 20, 2020, Grimm Company consigned 40 freezers to Holden Company costing P 7,000
each for sale at P 10,000 each and paid P 8,000 in transportation costs. On December 30, 2020,
Holden reported the sale of 10 freezers and remitted P 85,000. The remittance was net of the
agreed 15% comission. What amount should Grimm recognize as consignment sales revenue for
2020?
A. P 77,000
B. P 85,000
C. P 98,000
D. P 100,000

SOLUTION:
Freezers sold = 10 units sold x P 10,000 units selling price = P 100,000

Related journal entry:

Cash (P 100,000 - P 15,000) 85,000
Commission expense (P 100,000 x 15%) 15,000
Sales (10 units x P 10,000 each) 100,000

MCQ 8
West Retailers purxchased merchandise with a list price of P 20,000 subject to trade discounts of
20% and 10%, with no cash discounts allowable. West should record the cost of this merchandise
as
A. P 14,000
B. P 14,400
C. P 15,600
D. P 20,000

SOLUTION:
Cost of merchandise = P 20,000 x 80% x 90% = P 14,400

MCQ 9
Dean Sportwear, Inc., regularly buys sweaters from Mill Company and is allowed a trade discount
of 30% from the list price. Dean made a purchase on March 20, 2020, and received an invoice with
a list price of P 60,000, a freight charge of P 1,500 and payment terms of net 30 days. Dean should
record the purchase at
Dean Sportwear, Inc., regularly buys sweaters from Mill Company and is allowed a trade discount
of 30% from the list price. Dean made a purchase on March 20, 2020, and received an invoice with
a list price of P 60,000, a freight charge of P 1,500 and payment terms of net 30 days. Dean should
record the purchase at
A. P 42,000
B. P 43,500
C. P 60,000
D. P 61,500

SOLUTION:
Cost of purchase (P 60,000 x 70%) 42,000
Freight charge 1,500
Amount of purchase to be recorded 43,500

MCQ 10
On June 1, 2020, Pitt Corporation sold merchandise with a list price of P 500,000 to Burr on
account. Pitt allowed trade discounts of 30% and 20%. Credit terms were 2/15, n/40 and the sale
was FOB shipping point. Pitt prepaid P 20,000 of delivery costs for Burr as an accommodation. On
June 12, 2020, Pitt received from Burr a remittance in full payment amounting to
A. P 274,400
B. P 294,000
C. P 294,400
D. P 314,000

SOLUTION:
Sales Revenue (P 500,000 x 70% x 80%) 280,000
Less: Sales discount (P 280,000 x 2%) 5,600
Net sales 274,400
Add: Delivery cost accommodated for Bur 20,000
Cash receipt on June 12, 2020 294,400

Notes:
The term is FOB shipping point which means that the buyer is responsible to pay the freight.

Related journal entries:

Accounts Receivable 280,000
Sales Revenue 280,000
Credit sales.

Accounts Receivable 20,000

Cash 20,000
Freight accommodation for Burr.

Cash (P 300,000 - P 5,600) 294,400

Sales Discount (P 280,000 x 2%) 5,600
Accounts Receivable 300,000
Collection of accounts within the discount period

MCQ 11
Rabb Company records its purchases at gross amunts but wishes to change to recording purchases
net of purchase discounts. Discount available on purchases recorded from October 1, 2019 to
September 30, 2020, totaled P 20,000. Of this amount, P 2,000 is still available in the accounts
payable balance. The balances in the accounts as of and for the year ended September 30, 2020
before conversion are
Rabb Company records its purchases at gross amunts but wishes to change to recording purchases
net of purchase discounts. Discount available on purchases recorded from October 1, 2019 to
September 30, 2020, totaled P 20,000. Of this amount, P 2,000 is still available in the accounts
payable balance. The balances in the accounts as of and for the year ended September 30, 2020
before conversion are

Purchases 1,000,000
Purchase discounts taken 8,000
Accounts Payable 300,000

What is the accounts payable balance as of September 30, 2020 after the conversion?
A. P 298,000
B. P 292,000
C. P 288,000
D. P 282,000

SOLUTION:
Accounts Payable, at gross, 9/30/2020 300,000
Less: Discount available on 9/30/2020 2,000
Accounts Payable, at net, 9/30/2020 298,000

MCQ 12
Duke Company specializes in the sale of IBM compatibles and software packages. It had the
following transactions with one of its suppliers.

Purchases of IBM compatibles 1,700,000

Purchases of commercial software packages 1,200,000
Returns and allowances 50,000
Purchase discounts taken 17,000

Purchases were made throughout the year on terms 2/10, n/30. all returns and allowances took
place within 5 days of purchase and prior to any payment on account. Discount lost is
A. P 57,000
B. P 40,000
C. P 17,000
D. P 41,000

SOLUTION:
Purchases of IBM compatibles 1,700,000
Purchases of commercial software packages 1,200,000
Returns and allowances -50,000
Net Purchases 2,850,000
Multiply by cash discount rate 2%
Purchase Discount 57,000
Purchase discounts taken -17,000
Purchase Discount Lost 40,000
MCQ 1
The following information is available for Naab Company for 2020:

Freight - in 30,000
Purchase returns 75,000
Selling expense 150,000
Ending inventory 260,000

The cost of goods sold is equal to 400% of selling expenses.

What is the cost of goods available for sale?

A. P 600,000
B. P 890,000
C. P 825,000
D. P 860,000

SOLUTION:
Selling expenses 150,000
Multiply by rate of COGS to selling expenses 400%
Cost of goods sold 600,000
Add: Ending inventory 260,000
Cost of goods available for sale 860,000

MCQ 2
The following information was available from the inventory records of Rich Company for January:

Units Unit Cost Total Cost

Balance, January 1 3,000 9.77 29,310
Purchases
January 6 2,000 10.30 20,600
January 26 2,700 10.71 28,917

Sales:
January 7 2,500
January 31 4,000

Balance, January 31 1,200

. Assuming that Rich 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. P 12,606
B. P 12,284
C. P 12,312
D. P 12,432

SOLUTION:
Units Unit Cost Total Cost WAUC
Balance, January 1 3,000 9.77 29,310
Purchases
January 6 2,000 10.30 20,600
January 26 2,700 10.71 28,917
 Goods available for sale 7,700 78,827 10.24

Ending inventory, January 31

(1,200 units x P 10.24) 12,285

. Assuming that Rich maintains perpetual inventory records, what should be the inventory at January 31, using the
moving-average inventory method, rounded to the nearest dollar?
A. P 12,606
B. P 12,284
C. P 12,312
D. P 12,432

RECEIVED BALANCES
Date Trans. Units Unit Cost Total Cost Units
January 1 Beginning 3,000
January 6 Purchases 2,000 10.30 20,600 5,000
January 7 Sales 2,500 2,500
January 26 Purchases 2,700 10.71 28,917 5,200
January 31 Sales 4,000 1,200

MCQ 3
Niles Co. has the following data related to an item of inventory:

Inventory, March 1 100 units @ P 4.20

Purchase, March 7 350 units @ P 4.40
Purchase, March 16 70 units @ P 4.50
Inventory, March 31 130 units

The value assigned to cost of goods sold if Niles uses FIFO is

A. P 579
B. P 552
C. P 1,723
D. P 1,696

SOLUTION:
Inventory, March 1 100
Purchase, March 7 350
Purchase, March 16 70
Inventory, March 31 -130
Sold units 390

Units Unit Price Total Price

Inventory, March 1 100 4.2 420
Purchase, March 7 290 4.4 1,276
Cost of goods sold 1,696

MCQ 4

Emley Company has been using the average cost method of inventory valuation for 10 years, since it began
operations. Its 2020 ending inventory was P 40,000, but it would have been P 60,000 if FIFO had been
used. Thus, if FIFO had been used, Emley's income before income taxes would have been
A. P 20,000 greater over the 10-year period.
B. P 20,000 less over the 10-year period.
C. P 20,000 greater in 2020.
D. P 20,000 less in 2020.

SOLUTION: Invty. Ending

Net income using FIFO method 60,000
Net income using Average cost method -40,000
Increase in net income in 2020 20,000

If FIFO had been used, Emley's income before income taxes would have been P 20,000 greater over the
10-year period.

MCQ 5
Transactions for the month of June were:

Purchases
Transaction Units Unit Price
June 1 Balance 800 3.2
3 2,200 3.1
7 1,200 3.3
15 1,800 3.4
22 500 3.5

Sales
Transaction Units Unit Price
June 2 600 5.5
6 1,600 5.5
9 1,000 5.5
10 400 6.0
18 1,400 6.0
25 200 6.0

. Assuming that perpetual inventory records are kept in pesos, the ending inventory on a FIFO basis is

A. P 4,110
B. P 4,160
C. P 4,290
D. P 4,470

SOLUTION:
June 1 Balance 800
3 Purchases 2,200
7 Purchases 1,200
15 Purchases 1,800
22 Purchases 500
GAFS 6,500
2 Sales 600
6 Sales 1,600
9 Sales 1,000
10 Sales 400
18 Sales 1,400
25 Sales 200 -5,200
30 Balance 1,300

ENDING INVENTORY - FIFO:

 June 22 Purchases 500 3.5 1,750
15 Purchases 800 3.4 2,720
TOTAL 1,300 4,470

. Assuming that perpetual inventory records are kept in units only, the ending inventory on an average-
cost basis, rounded to the nearest peso, is
A. P 4,096
B. P 4,238
C. P 4,290
D. P 4,322

SOLUTION:
Transaction Units Unit Price Total Price WAUC
June 1 Balance 800 3.2 2,560
3 2,200 3.1 6,820
7 1,200 3.3 3,960
15 1,800 3.4 6,120
22 500 3.5 1,750
6,500 21,210 3.26

Weighted average unit cost (WAUC) = GAFS in pesos / GAFS in units

Weighted average unit cost (WAUC) = P 21,210 / 6,500 units
Weighted average unit cost (WAUC) = P 3.26

ENDING INVENTORY - FIFO:

1,300 units x P 3.26 per unit = P 4,238

MCQ 6
Milford Company had 500 units of “Tank” in its inventory at a cost of $4 each. It purchased, for $2,800, 300
more units of “Tank”. Milford then sold 400 units at a selling price of $10 each, resulting in a gross profit of
$1,600. The cost flow assumption used by Johnson
A. is FIFO.
B. is specific identification.
C. is weighted average.
D. cannot be determined from the information given

SOLUTION:
Selling price of 400 units at P 10 each 4,000
Less: Gross profit from 400 units sold 1,600
Cost of sales of 400 units sold 2,400

Units Unit Cost Total Cost WAUC

Inventory beginning 500 4 2,000
Purchases 300 9 2,800
GAFS 800 4,800 6

FIFO Method - Cost of Sales

Inventory, beginning 400 4 1,600
Purchases 0 0 0
400 1,600

Weighted Average - Inventory, ending

400 units sold x P 6 WAUC = P 2,400
MCQ 7

June Corp. sells one product and uses a perpetual inventory system. The beginning inventory consisted of
10 units that cost P 20 per unit. During the current month, the company purchased 60 units at P 20 each.
Sales during the month totaled 45 units for P 43 each. What is the number of units in the ending inventory?
A. 10 units.
B. 15 units.
C. 25 units.
D. 70 units.

SOLUTION:
Units Unit Cost Total Cost
Inventory beginning 10 20 200
Add: Purchases 60 20 2,800
GAFS 70 3,000
Less:Units sold 45
Ending Inventory 25

MCQ 8
June Corp. sells one product and uses a perpetual inventory system. The beginning inventory consisted of
10 units that cost P 20 per unit. During the current month, the company purchased 60 units at P 20 each.
Sales during the month totaled 45 units for P 43 each. What is the cost of goods sold using the FIFO
method?
A. P 200
B. P 900
C. P 1,200
D. P 1,935

SOLUTION:
Units Unit Cost Total Cost
Inventory beginning 10 20 200
Add: Purchases 35 20 700
Cost of goods sold 45 900

MCQ 9

Checkers uses the periodic inventory system. For the current month, the beginning inventory consisted of
1,200 units that cost P12 each. During the month, the company made two purchases: 500 units at P13 each
and 2,000 units at P13.50 each. Checkers also sold 2,150 units during the month. Using the average cost
method, what is the amount of cost of goods sold for the month?
A. P 27,843
B. P 28,950
C. P 26,975
D. P 27,950

SOLUTION:
Units Unit Cost Total Cost WAUC
Inventory beginning 1,200 12.00 14,400
Add: Purchases 500 13.00 6,500
Purchases 2,000 13.50 27,000
Goods available for sale 3,700 47,900 12.95

Cost of Goods sold - Average Cost Method:

2,150 units sold x P 12.95 WAUC = P 27,843

MCQ 9
Chess Top uses the periodic inventory system. For the current month, the beginning inventory consisted of
200 units that cost P 65 each. During the month, the company made two purchases: 300 units at P 68 each
and 150 units at P 70 each. Chess Top also sold 500 units during the month. Using the average cost
method, what is the amount of ending inventory?
A. P 10,500
B. P 33,770
C. P 33,400
D. P 10,131

SOLUTION:
Units Unit Cost Total Cost WAUC
Inventory beginning 200 65.00 13,000
Add: Purchases 300 68.00 20,400
Purchases 150 70.00 10,500
Goods available for sale 650 43,900 67.54
Less: Units sold 500
Ending inventory, in units 150
Multiply by WAUC 67.54
Ending inventory, peso 10,131

MCQ 10
The following information was derived from the 2010 accounting records of Perez Co.:

PEREZ'S
Cental Goods Held
Warehouse by Consignee
Beginning inventory 130,000 14,000
Purchases 575,000 70,000
Freight-in 10,000
Transportation to consignees 5,000
Freight-out 30,000 8,000
Ending inventory 145,000 20,000

Perez's 2010 cost of sales was

A. P 570,000
B. P 600,000
C. P 634,000
D. P 639,000

SOLUTION:
PEREZ'S
Cental Goods Held
Warehouse by Consignee Total EXPLANATION
Beginning inventory 130,000 14,000 144,000
Purchases 575,000 70,000 645,000
Freight-in 10,000 10,000
Transportation to consignees 5,000 5,000
Freight-out 30,000 8,000 - Selling expense
Ending inventory 145,000 20,000 -165,000
Cost of Sales 639,000
MCQ 11
Glen Company has the following data pertaining to the year ended December 31, 2020:

Purchases 450,000
Beginning inventory 170,000
Ending inventory 210,000
Freight-in 50,000
Freight-out 75,000

How much is the cost of goods sold for 2020?

A. P 385,000
B. P460,000
C. P 485,000
D. P 540,000

SOLUTION:
Purchases 450,000
Beginning inventory 170,000
Freight-out 50,000
Ending inventory -210,000
Cost of goods sold for 2020 460,000

Notes:
Freight-out is reported as selling expense.
ventory at January 31,
at January 31, using the

BALANCES
Unit Cost Total Cost
9.77 29,310
9.982 49,910
9.982 24,955
10.36 53,872
10.36 12,432
MCQ 1
Hero Company reported inventory on December 31, 2020 at P 6,000,000 based on a physical count of goods priced at cost, and
before any necessary year-end adjustment relating to the following:

• Included in the physical inventory count were goods billed to a customer FOB shipping point on December 31, 2020.
These goods had a cost of P 125,000 and were picked up by the carrier on January 10, 2020.

• Goods shipped FOB shipping point on December 28, 2019 from a vendor to Heror Company were received on
January 4, 2020. The invoice cost was P 300,000.

What amount should be reported as inventory on Decenber 31, 2020?

A. P 5,875,000
B. P 6,000,000
C. P 6,175,000
D. P 6,300,000

SOLUTION:
Unadjusted inventory, 12/31/2020 balance 6,000,000
Adjustments:
(a) Included in the physical inventory count were goods billed to a customer FOB shipping point on
December 31, 2020. These goods had a cost of P 125,000 and were picked up by the carrier on
January 10, 2020. -
(b) Goods shipped FOB shipping point on December 28, 2019 from a vendor to Heror Company
were received on January 4, 2020. The invoice cost was P 300,000. 300,000
Adjusted inventory, 12/31/2020 balance 6,300,000

MCQ 2
Empty Company reported inventory on December 31, 2020 at P 2,500,000 based on physical count priced at cost and before any
necessary adjustment for the following:

• Merchandise costing P 100,000 shipped FOB shipping point from a vendor on December 30, 2020 was received and
recorded on January 5,2021.
• Goods in the shipping area were excluded from inventory although shipment was not made until January 5, 2021. The
goods billed to the customer FOB shipping point on December 30, 2020 had a cost of P 400,000.

What amount should be reported as inventory on December 31, 2020?

A. P 2,500,000
B. P 2,600,000
C. P 2,900,000
D. P 3,000,000

SOLUTION:
Unadjusted inventory, 12/31/2020 balance 2,500,000
Adjustments:
(a) Merchandise costing P 100,000 shipped FOB shipping point from a vendor on
December 30, 2020 was received and recorded on January 5, 2021. 100,000
(b) Goods in the shipping area were excluded from inventory although shipment was
not made until January 5, 2021. The goods billed to the customer FOB shipping
point on December 30, 2020 had a cost of P 400,000. 400,000
Adjusted inventory, 12/31/2020 balance 3,000,000

MCQ 3
Kew Company reported accounts payable on December 31, 2020 at P 2,200,000 before considering the following data:

•
Goods shipped to Kew FOB shipping point on December 22, 2020 were lost in transit. The invoice cost of P 40,000
was not recorded by Kew. On January 7, 2021, Kew filed a P 40,000 claim against the common carrier.
 Goods shipped to Kew FOB shipping point on December 22, 2020 were lost in transit. The invoice cost of P 40,000
was not recorded by Kew. On January 7, 2021, Kew filed a P 40,000 claim against the common carrier.

• On December 27, 2019, a vendor authorized Kew to return for full credit goods shipped and billed at P 70,000 on
December 15, 2020. The returned goods were shipped by Kew on December 28, 2020. A P 70,000 credit memo was
received and recorded by Kew on January 5, 2021.

• On December 31, 2020, Kew has a P 500,000 debit balance in accounts payable to Ross, a supplier, resulting from a
P 500,000 advance payment for goods to be manufactured.

What amount should be reported as accounts payable on December 31, 2020?

A. P 2,170,000
B. P 2,680,000
C. P 2,730,000
D. P 2,670,000

SOLUTION:
Unadjusted Accounts Payable, 12/31/2020 balance 2,200,000
Adjustments:
(a) Goods shipped to Kew FOB shipping point on December 22, 2020 were lost in transit. The
invoice cost of P 40,000 was not recorded by Kew. On January 7, 2021, Kew filed a P 40,000
claim against the common carrier. 40,000
(b) On December 27, 2019, a vendor authorized Kew to return for full credit goods shipped and
billed at P 70,000 on December 15, 2020. The returned goods were shipped by Kew on December
28, 2020. A P 70,000 credit memo was received and recorded by Kew on January 5, 2021.
-70,000
(c) On December 31, 2020, Kew has a P 500,000 debit balance in accounts payable to Ross, a
supplier, resulting from a P 500,000 advance payment for goods to be manufactured. 500,000
Adjusted Accounts Payable, 12/31/2020 balance 2,670,000

MCQ 4
Bell Inc. took a physical inventory at the end of the year and determined that P 650,000 of goods were on hand. In addition, Bell,
Inc. determined that P 50,000 of goods that were in transit that were shipped f.o.b. shipping were actually received two days after
the inventory count and that the company had P 75,000 of goods out on consignment.

What amount should Bell report as inventory at the end of the year?
A. P 650,000
B. P 700,000
C. P 725,000
D. P 775,000

SOLUTION:
Unadjusted inventory at year-end 650,000
Items excluded as inventory but already received
two days after the count, FOB shipping point 50,000
Goods out on consignment 75,000
Adjusted inventory at year-end 775,000

MCQ 5
Risers Inc. reported total assets of P 1,200,000 and net income of P 135,000 for the current year. Risers determined that inventory
was overstated by P 10,000 at the beginning of the year (this was not corrected). What is the corrected amount for total assets
and net income for the year?
A. P 1,200,000 and P 135,000
B. P 1,200,000 and P 145,000
C. P 1,190,000 and P 125,000
D. P 1,210,000 and P 145,000

SOLUTION:
Total Assets Net income
Unadjusted balances 1,200,000 135,000
Effect if overstated inventory beginning - 10,000
Adjusted balances 1,200,000 145,000

Notes:
Inventory, beginning was already sold at the end of the year and considered as part of Cost of Sale udner FIFO method (the
problem is silent). Therefore, it is no longer part of ending inventory.

If beginning inventory is overstated, net income during the year of error is understated because these two items have inverse
relationship.

MCQ 6
Black Company reported accounts payable on December 31, 2020 at P 4,500,00 before any year-end adjustmets relating to the
following transactions:

• On December 31, 2020, Black Company wrote and recorded checks to creditors totalling P 2,000,000 causing an
overdraft of P 500,000 in Black Company's bank account on December 31, 2020. The checks were mailed out on
January 10, 2021

•
On December 28, 2020, Black Company purchased and received goods for P 750,000 terms 2/10, n/30. Black
Company records purchases and accounts payable at net amount. The invoice recorded and paid January 5, 2020.

• Goods shipped FOB destination, 5.10, n.30 on December 20, 2020 from a vendor to Black Company were received
January 15, 2020. The invoice cost was P 325,000.

On December 31, 2020, what amount should be reported on Accounts Payable?

A. P 7,575,000
B. P 7,250,000
C. P 7,235,000
D. P 6,553,500

SOLUTION:
Unadjusted Accounts Payable, 12/31/2020 balance 4,500,000
Adjustments:
(a) On December 31, 2020, Black Company wrote and recorded checks to creditors totalling P
200,000 causing an overdraft of P 500,000 in Black Company's bank account on December 31,
2020. The checks were mailed out on January 10, 2021 2,000,000
(b) On December 28, 2020, Black Company purchased and received goods for P 750,000 terms
2/10, n/30. Black Company records purchases and accounts payable at net amount. The invoice
recorded and paid January 5, 2020. (P 735,000 x 98%) 735,000
(c) Goods shipped FOB destination, 5/10, n.30 on December 20, 2020 from a vendor to Black
Company were received January 15, 2020. The invoice cost was P 325,000. -
Adjusted Accounts Payable, 12/31/2020 balance 7,235,000

MCQ 7
A physical count on December 31, 2020 revealed that Joyce Company had inventory with a cost of P 4,410,000.

The following items were excluded from the amount:

• Merchandise of P 610,000 is held by Joyous on consignment.

• Merchandise costing P 380,000 was shipped by Joyous FOB Destination to a customer on December
31, 2020. The customer was expected to receive the goods on January 5, 2021.
• Merchandise costing P 460,000 was shipped by Joyous FOB Shipping point to a customer on December
29, 2020.The customer was expected to receive the goods on January 10, 2020.
• Merchandise costing P 830,000 shipped by a vendor FOB Destination on December 31, 2020 was
received by Joyous on January 15, 2021.
• Merchandise costing P 510,000 purchased FOB shipping point was shipped by the supplier on December
31, 2020 and received by Joyous on January 5, 2021.
 Merchandise costing P 510,000 purchased FOB shipping point was shipped by the supplier on December
31, 2020 and received by Joyous on January 5, 2021.

What amount of inventory should be reported on December 31, 2020?

A. P 5,300,000
B. P 4,690,000
C. P 3,800,000
D. P 4,920,000

SOLUTION:
Unadjusted inventory per physical count, 12/31/2020 4,410,000
Adjustments:
(a) Merchandise of P 610,000 is held by Joyous on consignment. - Joyous is consignee; already ecluded
(b) Merchandise costing P 380,000 was shipped by Joyous FOB
Destination to a customer on December 31, 2020. The customer
was expected to receive the goods on January 5, 2021. 380,000 Joyous is the seller; erroneously exclude
(c)
Merchandise costing P 460,000 was shipped by Joyous FOB
Shipping point to a customer on December 29, 2020.The customer
was expected to receive the goods on January 10, 2020. - Joyous is the seller; already excluded
(d) Merchandise costing P 830,000 shipped by a vendor FOB
Destination on December 31, 2020 was received by Joyous on
January 15, 2021. - Joyous is the buyer; already excluded
(e) Merchandise costing P 510,000 purchased FOB shipping point was
shipped by the supplier on December 31, 2020 and received by
Joyous on January 5, 2021. 510,000 Joyous is the buyer; erroneously exclude
Adjusted inventory per physical count, 12/31/2020 5,300,000

MCQ 8
Audacity Company counted the ending inventory on December 31, 2020 and reported the amount of P 2,000,000
before any corrections.

None of the following items were included when the total amount of the ending inventory was computed:

• Goods located in the entity's warehouse are on consigmment from

another entity 150,000
• Goods sold by the entity and shipped FOB destination were in transit
on December 31, 2020 and received by the customer om January 2,
2021. 200,000
• Goods purchased by the entity and shipped FOB shipping point were
in transit on December 31, 2020 and received by the entity on
January 2, 2021. 300,000
• Goods sold by the entity and shipped FOB shipping point were in
transit on December 31, 2020 and received by the customer on
January 2, 2020. 400,000

What amount of inventory should be reported on Decemner 31, 2020?

A. P 2,500,000
B. P 2,350,000
C. P 2,900,000
D. P 2,750,000

SOLUTION:
Unadjusted inventory at December 31, 2020 2,000,000
Adjustments:
(a) Goods located in the entity's warehouse are on consigmment from Audacity is the consignee; already
another entity - excluded
(b) Goods sold by the entity and shipped FOB destination were in transit
on December 31, 2020 and received by the customer on January 2, Audacity is the seller; erroneously
2021. 200,000 excluded
(c) Goods purchased by the entity and shipped FOB shipping point
were in transit on December 31, 2020 and received by the entity on
January 2, 2021.
 Goods purchased by the entity and shipped FOB shipping point
were in transit on December 31, 2020 and received by the entity on Audacity is the buyer; erroneously
January 2, 2021. 300,000 excluded
(d) Goods sold by the entity and shipped FOB shipping point were in
transit on December 31, 2020 and received by the customer on Audacity is the seller; correctly
January 2, 2020. - excluded
Adjusted inventory at December 31, 2020 2,500,000

MCQ 9
Reverend Company conducted a physical count on December 31, 2020 which revealed merchandise with a total cost
of P 5,000,000.

However, further investigation revealed that the following items were excluded from the count.

• Goods sold to a customer which are being held for the customer to call at the customer's convenience with a
cost of P 200,000.

•
A packing case containing a product costing P 500,000 was standing in the shipping room when the physical
inventory was taken. The product was not included in the inventory because it was marked "held for shipping
instructions". The investigation revealed that the customer's order was dated December 28, 2020, but that the
case was shipped and the customer billed on January 5, 2021.

• A special machine costing P 250,000 fabricated to order for a customer was finished and specifically
segregated at the back part of the shipping room on December 31, 2020. The customer was billed on that date
and the amchine was excluded from inventory although it was shipped on January 5, 2021.

• Goods in process costing P 300,000 held by an outside processor for further processing.

• Goods costing P 50,000 shipped by a vendor FOB seller on December 31, 2020 and received by the entity on
January 10, 2021.

What is the correct amount of inventory that should be reported on December 31, 2020?
A. P 5,500,000
B. P 5,550,000
C. P 5,850,000
D. P 5,800,000

SOLUTION:
Unadjusted inventory at December 31, 2020 5,000,000
Adjustments:
(a) Goods sold to a customer which are being held for the customer to call at the Reverend is the seller; co
customer's convenience with a cost of P 200,000. - excluded
(b)

A packing case containing a product costing P 500,000 was standing in the shipping
room when the physical inventory was taken. The product was not included in the
inventory because it was marked "held for shipping instructions". The investigation
revealed that the customer's order was dated December 28, 2020, but that the Reverend is the seller; err
case was shipped and the customer billed on January 5, 2021. 500,000 excluded
(c) A special machine costing P 250,000 fabricated to order for a customer was
finished and specifically segregated at the back part of the shipping room on
December 31, 2020. The customer was billed on that date and the machine was Reverend is the seller; co
excluded from inventory although it was shipped on January 5, 2021. excluded
-
(d) Goods in process costing P 300,000 held by an outside processor for further Reverend is the owner; er
processing. 300,000 excluded
(e) Goods costing P 50,000 shipped by a vendor FOB seller on December 31, 2020 Reverend is the buyer; err
and received by the entity on January 10, 2021. 50,000 excluded
Adjusted inventory at December 31, 2020 5,850,000

MCQ 10
Shindig Company is preparing the 2020 year-end financial statements. Prior to any adjustments, inventory is valued
at P 7,600,000.

•
Goods costing P 250,000 were received from a vendor on January 5, 2020. The related invoice was received
and recorded on January 12, 2021. The goods were shipped December 31, 2020 FOB shipping point.

• Goods costing P 850,000 were shipped on December 31, 2020 to a customer FOB shipping point. The goods
were included in ending inventory for 2020 even though the sale was recorded in 2020.

• A P 350,000 shipment of goods to a customer on December 31, 2020 FOB Destination was not included in the
year-end inventory. The goods cost P 260,000 and were delivered to the customer on January 15, 2021. The
sale was properly recorded in 2021.

• A invoice for goods costing P 350,000 was received and recordded as a purchase on December 31, 2020. The
related goods shipped FAS in transit on December 31, 2020 and received on January 5, 2021 and were not
inluded in the physical inventory.

• A P 1,050,000 shipment of goods to a customer on December 30, 2020 FOB destination was recorded as a
sale in 2020. The goods costing P 840,000 and delivered to the customer on January 5, 2021 were not
included in 2020 ending inventory.

What is the correct inventory on December 31, 2020?

A. P 9,300,000
B. P 7,610,000
C. P 8,100,000
D. P 8,450,000

SOLUTION:
Unadjusted inventory, 12/31/2020 7,600,000
Adjustments:
(a) Goods costing P 250,000 were received from a vendor on January 5, 2020. The
related invoice was received and recorded on January 12, 2021. The goods were
shipped December 31, 2020 FOB shipping point. 250,000
(b) Goods costing P 850,000 were shipped on December 31, 2020 to a customer FOB
shipping point. The goods were included in ending inventory for 2020 even though
the sale was recorded in 2020. -850,000
(c) A P 350,000 shipment of goods to a customer on December 31, 2020 FOB
Destination was not included in the year-end inventory. The goods cost P 260,000
and were delivered to the customer on January 15, 2021. The sale was properly
recorded in 2021.
260,000
(d)
A invoice for goods costing P 350,000 was received and recorded as a purchase
on December 31, 2020. The related goods shipped FAS in transit on December 31,
2020 and received on January 5, 2021 and were not inluded in the physical
inventory. 350,000
(e)
A P 1,050,000 shipment of goods to a customer on December 30, 2020 FOB
destination was recorded as a sale in 2020. The goods costing P 840,000 and
delivered to the customer on January 5, 2021 were not included in 2020 ending
inventory. 840,000
Adjusted inventory, 12/31/2020 8,450,000

Notes:
The term FAS means free alongside. This is a term used in international trade contracts that indicates that the seller
must arrange for the goods purchased to be delivered next to a particular vessel in a particular port in order to be
ready for transfer to a waiting ship. (INVESTOPEDIA)

MCQ 11
White Company's usual sales terms are net 60 days, FOB shipping point. Sales, net of returns and allowances,
totaled P 5,000,000 for the year ended December 31, 2020, before year end adjustment.
 • On December 27, 2020, White Company authorized a customer to return, for full credit, goods shipped and
billed at P 50,000 on December 15, 2020. The returned goods were received by White Company on January 5,
2020 and a P 50,000 credit memo was issued on the same date.

• Goods with an invoice amount of P 300,000 were billed to a customer on January 10, 2021. The goods were
shipped on December 31, 2020.

• Goods with an invoice amount of P 200,000 were billed and recorded on December 30, 2020. The goods were
shipped on January 5, 2021.

• On January 5, 2021, a customer notified White Company that goods billed at P 500,000 and shipped on
December 31, 2020 were lost in transit.

What amount of net sales should be reported for the current year?
A. P 5,050,000
B. P 5,550,000
C. P 4,550,000
D. P 4,450,000

SOLUTION:
Unadjusted net sales for the year 2020 5,000,000
Adjustments:
(a)
On December 27, 2020, White Company authorized a customer to return, for full
credit, goods shipped and billed at P 50,000 on December 15, 2020. The returned
goods were received by White Company on January 5, 2020 and a P 50,000 credit
memo was issued on the same date. -50,000
(b) Goods with an invoice amount of P 300,000 were billed to a customer on January
10, 2021. The goods were shipped on December 31, 2020. 300,000
(c) Goods with an invoice amount of P 200,000 were billed and recorded on December
30, 2020. The goods were shipped on January 5, 2021. -200,000
(d) On January 5, 2021, a customer notified White Company that goods billed at P
500,000 and shipped on December 31, 2020 were lost in transit. -
Adjusted net sales for the year 2020 5,050,000

MCQ 12
Purple Company had sales of P 4,000,000 during December of the current year. Experience has shown that
merchandise equaling 7% of sales will be returned within 30 days and an additional 3% will be returned within 30
days. Returned merchandise is readily resalable.

In addition, merchandise equaling 15% of sales will be exchanged for merchandise of equal or greater value.

What amount should be reported for net sales for the month of December?
A. P 3,600,000
B. P 3,400,000
C. P 3,120,000
D. P 3,000,000

SOLUTION:
Sales during the year 4,000,000
Less: Expected sales returns
[P 4,000,000 x (7% + 3%)] 400,000
Net sales for the month od December 3,600,000

MCQ 13
Yellow Company, a distributor of machinery, bought a machine from the manufacturer in November 2019 for P
500,000.

On December 30, 2020, the entity sold this amchine for P 50,000, under the following terms: 2% discount if paid
within 30 days, 1% discount if paid after thirty days but within sixty days, or payable in full within ninety days if not
paid within the discount period.
On December 30, 2020, the entity sold this amchine for P 50,000, under the following terms: 2% discount if paid
within 30 days, 1% discount if paid after thirty days but within sixty days, or payable in full within ninety days if not
paid within the discount period.

However, the customer had the right to return this machine to Yellow Company if it was unable to resell the machine
before expiration of the ninety - day payment period, I which case the customer's obligation to Yellow Company
would be cancelled.

In the net sales for the year ended December 31, 2020, what amount should be included for the sale of the machine?
A. P 750,000
B. P 735,000
C. P 742,500
D. P 0

SOLUTION:
ZERO, because the sale can be cancelled if the machine cannot be sold within the 90-day period.

MCQ 14
On October 1, 2020, Indomitable Company sold 100,000 gallons of heating oil at P 30 per gallon. Fifty thousand
gallons were delivered on December 15, 2020, and the remaining 50,000 gallons were delivered on January 15,
2020.

Payment terms were: 50% due on October 1, 2020, 25% on the first delivery, and the remaining 25% due on the
second delivery.

What amount of sales revenue should be recognized during 2020?

A. P 3,000,000
B. P 1,500,000
C. P 2,250,000
D. P 1,000,000

SOLUTION:
Number of gallons delivered in 2020 50,000 gallons
Multiply by unit selling price 30 per gallon
Sales revenue during 2020 1,500,000
oods priced at cost, and

on December 31, 2020.

.

were received on

d at cost and before any

2020 was received and

ntil January 5, 2021. The

000.

following data:

voice cost of P 40,000

on carrier.
billed at P 70,000 on
70,000 credit memo was

supplier, resulting from a

n hand. In addition, Bell,

y received two days after

determined that inventory

mount for total assets
r FIFO method (the

o items have inverse

justmets relating to the

,000,000 causing an
s were mailed out on

2/10, n/30. Black

paid January 5, 2020.

ompany were received

signee; already ecluded

seller; erroneously excluded

seller; already excluded

buyer; already excluded

buyer; erroneously excluded

e consignee; already

e seller; erroneously
e buyer; erroneously

e seller; correctly

Reverend is the seller; correctly

excluded

Reverend is the seller; erroneously

excluded

Reverend is the seller; correctly

excluded
Reverend is the owner; erroneously
excluded
Reverend is the buyer; erroneously
excluded
MCQ 1
Gatekeeper Company has two products with cost and selling price as follows:

Product X Product Y
Selling price 2,000,000 3,000,000
Estimated selling cost 600,000 700,000
Materials and conversion cost 1,500,000 1,800,000
General administration cost 300,000 800,000

At year-end, the manufacture of inventory has been completed but no selling cost has yet been incurred.

. Under LCNRV by individual item, the inventory shall be measured at what amount?
A. P 3,700,000
B. P 3,200,000
C. P 3,800,000
D. P 3,300,000

SOLUTION:
NET REALIZABLE VALUE
Cost Selling P. ESC NRV LCNRV
Product X 1,500,000 2,000,000 600,000 1,400,000 1,400,000
Product Y 1,800,000 3,000,000 700,000 2,300,000 1,800,000
Total 3,300,000 3,700,000 3,200,000

. Under LCNRV by total, the inventory shall be measured at what amount?

A. P 3,300,000
B. P 3,700,000
C. P 3,800,000
D. P 3,200,000

SOLUTION:
Cost ESP/NRV LCNRV
Product X 1,500,000 2,000,000
Product Y 1,800,000 3,000,000
Total 3,300,000 5,000,000 3,300,000

MCQ 2
Starstruck Company is a retailer of Italian furniture and has five major product lines. At year end, the entity
provided the following inventory data:

Units Unit Cost NRV / Unit

Sofas 100 1,000 1,020
Dining Tables 200 500 450
Beds 300 1,500 1,600
Closets 400 750 770
Lounge chains 500 250 200

What is the inventory at year-end using the lower of cost and net realizable value?
A. P 1,104,000
B. P 1,075,000
C. P 1,998,000
D. P 2,033,000

SOLUTION:
TOTAL COST
Units Unit Cost NRV / Unit COST NRV
Sofas 100 1,000 1,020 100,000 102,000
Dining Tables 200 500 450 100,000 90,000
Beds 300 1,500 1,600 450,000 480,000
Closets 400 750 770 300,000 308,000
Lounge chains 500 250 200 125,000 100,000
inventory at year-end using the lower of cost and net realizable value

MCQ 3

Gem Company measured inventory at lower of cost and net realizable value. Data regarding the items in the inventory are:

Markers Pens Highlighters

Historical cost 240,000 188,000 300,000
Selling Price 360,000 250,000 360,000
Estimated cost to complete (ECC) 48,000 50,000 68,000
Replacement cost 208,000 168,000 318,000
Normal profit margin as a % of selling price 25% 25% 10%

What is the measurement of inventory?

A. P 720,000
B. P 728,000
C. P 676,000
D. P 694,000

SOLUTION: NET REALIZABLE VALUE

H. COST Selling Price ECC NRV LCNRV
Markers 240,000 360,000 48,000 312,000 240,000
Pens 188,000 250,000 50,000 200,000 188,000
Highlighter 300,000 360,000 68,000 292,000 292,000
Measurement of inventory at LCNRC 720,000

MCQ 3

Rios, Inc. uses International Financial Reporting Standards (IFRS). In 2020, Rios, Inc. experienced a decline in the value of
its inventory resulting in a write-down of its inventory from P 240,000 to P 200,000. The company used the loss method in
2019 to record the necessary adjustment and uses an allowance account to reduce inventory to NRV. In 2020, market
conditions have improved dramatically and Rios, Inc.’s inventory increases to an NRV of P 216,000. Which of the following
will Rios, Inc. record in 2020?
A. A debit to Recovery of Inventory Loss for P 16,000.
B. A credit to Recovery of Inventory Loss for P 24,000.
C. A debit to Allowance to Reduce Inventory to NRV of P 16,000.
D. A credit to Allowance to Reduce Inventory to NRV of P 24,000.

SOLUTION:
Journal Entry:
Allowance to Reduce Inventory to NRV 16,000
Recovery of Inventory Loss 16,000
(P 216,000 - P 200,000)
MCQ 4
Robust Inc. has the following information related to an item in its ending inventory. Acer Top has a cost of P 502, a selling
price of P 568, a cost to complete of P 53, and a cost to sell of P 38. What is the lower-of-cost-or-net realizable inventory
value for Acer Top?
A. P 515.
B. P 502.
C. P 477.
D. P 530.

SOLUTION:
Cost 502

Net Realizable Value:

Selling price 568
Cost to complete -53
Cost to sell -38 477

LCNRV 477
 Total LCNRV
100,000
90,000
450,000
300,000
100,000
1,040,000

e items in the inventory are:

ced a decline in the value of

y used the loss method in
NRV. In 2020, market
000. Which of the following
s a cost of P 502, a selling
r-net realizable inventory
MCQ 1
On November 15, 2020, Diamond Company entered into a commitment to purchase, 10,000 ounces of gold on
February 15, 2021 at a price of P 310 per ounce.

On December 31, 2020, the market price of gold is P 270 per ounce. On February 15, 2021, the price of golds is P
300 per ounce.

. What is the loss on purchase commitment to be recognized on December 31, 2020?

A. P 400,000
B. P 100,000
C. P 300,000
D. P 0

SOLUTION:
Market price of ounces of gold, 12/31/2020
(10,000 ounces x P 270 per ounce) 2,700,000
Less: Price commitment of ounces of gold, 11/15/2020
(10,000 ounces x P 310 per ounce) 3,100,000
Loss on purchase commitment, 12/31/2020 -400,000

. What is the gain on purchase commitment to be recognized on February 15, 2021?

A. P 400,000
B. P 300,000
C. P 100,000
D. P 0

SOLUTION:
Market price of ounces of gold, 2/15/2021
(10,000 ounces x P 300 per ounce) 3,000,000
Less: Price commitment of ounces of gold, 12/31/2020
(10,000 ounces x P 270 per ounce) 2,700,000
Gain on purchase commitment, 2/15/2021 300,000

. What amount should be debited to Purchases on February 15, 2021?

A. P ,3,000,000
B. P 3,100,000
C. P 2,700,000
D. P 3,500,000

SOLUTION:
Number of ounces purchased 10,000
Multiply by market price on purchase date, 2/15/2021 300
Amount debited to Purchases on 2/15/2021 3,000,000

. What amount should be recognized as accounts payable on February 15, 2021?

A. P 2,700,000
B. P 3,100,000
C. P 3,500,000
D. P 3,000,000

SOLUTION:
Number of ounces purchased 10,000
Multiply by fixed price on commitment date, 11/15/2020 310
 Amount recognized as Accounts Payable on 2/15/2021 3,100,000

MCQ 2
At the end of the fiscal year, Apha Airlines has an outstanding non-cancellable purchase commitment for the purchase
of 1 million gallons of jet fuel at a price of $ 4.10 per gallon for delivery during the coming summer. The company
prices its inventory at the LCNRV.

If the market price for jet fuel at the end of the year is $ 4.50, how would this situation be reflected in the annual
financial statements?
A. Record unrealized gains of $ 400,000 and disclose the existence of the purchase commitment.
B. No impact.
C. Record unrealized losses of $ 400,000 and disclose the existence of the purchase commitment.
D. Disclose the existence of the purchase commitment.

SOLUTION:
Disclose the existence of the purchase commitment.
No gain is to be recognized in the accounting books at the end of the fiscal year.

MCQ 3
At the end of the fiscal year, Apha Airlines has an outstanding purchase commitment for the purchase of 1 million
gallons of jet fuel at a price of P 4.60 per gallon for delivery during the coming summer. The company prices its
inventory at the LCNRV.

If the market price for jet fuel at the end of the year is P 4.25, how would this situation be reflected in the annual
financial statements?
A. Record unrealized gains of P 350,000 and disclose the existence of the purchase commitment.
B. No impact.
C. Record unrealized losses of P 350,000 and disclose the existence of the purchase commitment.
D. Disclose the existence of the purchase commitment.

SOLUTION:
Market price of jet fuel, 12/31
(1,000,000 gallons x P 4.25 per gallon) 4,250,000
Less: Price commitment of ounces of gold, 12/31/2020
(1,000,000 gallons x P 4.60 per gallon) 4,600,000
Loss on purchase commitment, 12/31 -350,000

Notes:
Record unrealized losses of P 350,000 and disclose the existence of the purchase commitment.

MCQ 4
During the current fiscal year, Jeremiah Corp. signed a long-term noncancellable purchase commitment with its
primary supplier. Jeremiah agreed to purchase P 2.5 million of raw materials during the next fiscal year under this
contract. At the end of the current fiscal year, the raw material to be purchased under this contract had a market value
of P 2.3 million.

What is the journal entry at the end of the current fiscal year?
A. Debit Unrealized Holding Loss for P 200,000 and credit Purchase Commitment Liability for P 200,000.
B. Debit Purchase Commitment Liability for P 200,000 and credit Unrealized Holding Gain for P 200,000.
C.
Debit Unrealized Holding Loss for P 2,300,000 and credit Purchase Commitment Liability for P 2,300,000.
D. No journal entry is required.

SOLUTION: 2,300,000
Market value of raw materials at year-end
Less: Purchase commitment for raw materials 2,500,000
Loss on purchase commitment, 12/31 -200,000

Journal Entry:
Unrealized Holding Loss 200,000
Purchase Commitment Liability 200,000

ANSWER - LETTER A

MCQ 5
During the prior fiscal year, Jeremiah Corp. signed a long-term noncancellable purchase commitment with its primary
supplier to purchase P 2.5 million of raw materials. Jeremiah paid the P 2.5 million to acquire the raw materials when
the raw materials were only worth P 2.2 million.

Assume that the purchase commitment was properly recorded. What is the journal entry to record the purchase?

A. Debit Inventory for P 2,200,000, and credit Cash for P 2,200,000.

B.
Debit Inventory for P 2,200,000, debit Unrealized Holding Loss for P 300,000, and credit Cash for P 2,500,000.
C. Debit Inventory for P 2,200,000, debit Purchase Commitment Liability for P 300,000 and credit Cash for P
2,500,000.
D. Debit Inventory for $2,500,000, and credit Cash for P 2,500,000.

SOLUTION:
Purchases (at market price) 2,200,000
Purchase Commitment Liability 300,000
Cash (at fixed price) 2,500,000

ANSWER - LETTER C
MCQ 1
Avarice Company has a recent gross profit history of 40% of net sales.

The following data are available from the accounting records for the three months ended March 31:

Inventory, January 1 650,000

Purchases 3,200,000
Net Sales 4,500,000
Purchase returns 75,000
Freight-in 50,000

Using the gross profit method, what is the estimated cost of inventory on March 31?
A. P 1,125,000
B. P 1,120,000
C. P 2,025,000
D. P 2,700,000

SOLUTION:
Inventory, January 1 650,000
Purchases 3,200,000
Purchase returns -75,000
Freight-in 50,000
Goods available for sale 3,825,000
Less: Cost of Sales
Net Sales 4,500,000
Multiply by cost rate (based on sales) 60% 2,700,000
Estimated cost of inventory, 3/31 1,125,000

MCQ 2
Celibacy Company provided the following information for the current year:

Beginning inventory 650,000

Purchases 2,300,000
Purchase returns 80,000
Freight-in 60,000
Sales 3,400,000
Sales Discounts 20,000
Sales Returns 30,000

At year-end, a physical inventory revealed that the ending inventory was only P 420,000. The gross profit on sales
has remained constant at 30%.

The entity suspects that some inventory may have been pilfered by one of the employees.

What is the estimated cost of missing inventory at year-end?

A. P 151,000
B. P 165,000
C. P 420,000
D. P 585,000
SOLUTION:
Beginning inventory 650,000
Purchases 2,300,000
Purchase returns -80,000
Freight-in 60,000
Goods available for sale 2,930,000
Less: Cost of Sales
Sales 3,400,000
Sales Returns -30,000
Net Sales 3,370,000
Multiply by cost rate (based on sales) 70% 2,359,000
Estimated Inventory ending 571,000
Less: Inventory, ending per physical count 420,000
Cost of missing inventory 151,000

NOTES:
Sales discount is not included in the computation because it does not involve physical transfer of inventory but only
decrease in amount.

MCQ 3
At year-end, Delectable Company experience a storm surge which caused severe damage to the entire inventory.
Based on recent history, the entity had a gross profit of 25% on sales.

The following information is available for the current year:

Beginning inventory 520,000

Purchases 4,120,000
Purchase returns 60,000
Sales 5,600,000
Sales returns 400,000
Sales allowances 100,000

What is the estimated cost of goods sold for the current year?
A. P 3,360,000
B. P 3,830,000
C. P 3,900,000
D. P 3,825,000

SOLUTION:
Cost of Sales
Sales 5,600,000
Sales returns -400,000
Net Sales 5,200,000
Multiply by cost rate (based on sales) 75%
Estimated cost of sales 3,900,000

NOTES:
Sales discount is not included in the computation because it does not involve physical transfer of inventory but only
decrease in amount.

MCQ 4
On December 31, 2020, a big fire caused a severe damage to the warehouse of Claire Company:
 2020 2021
Beginning inventory 1,000,000 -
Purchases 8,000,000 5,600,000
Purchase return 500,000 100,000
Sales 9,000,000 6,000,000

At the beginning of 2020, the entity changed the policy on the selling prices of the merchandise in order to produce a
gross profit rate of 5% higher than the gross profit rate in 2019.

Undamaged merchandise marked to sell at P 500,000 was salvaged. Damaged merchandise marked to sell at P
100,000 had an estimated realizable value of P 10,000.

What amount should be reported as inventory fire loss?

A. P 2,200,000
B. P 1,840,000
C. P 1,600,000
D. P 1,780,000

SOLUTION:
Beginning inventory, January 1, 2020 1,000,000
Purchases 8,000,000
Purchase returns -500,000
Goods available for sale 8,500,000
Less: Cost of Sales
Sales 9,000,000
Multiply by cost rate (based on sales) 70% 6,300,000
Estimated Inventory ending 2,200,000
Less: Damaged merchandise at NRV 10,000
Undamaged merchandise
(P 500,000 x 70%) 350,000 360,000
FIRE LOSS 1,840,000

Supporting computation:
YEAR 2018 2019
Sales 6,000,000 100% 100%
Cost of sales:
Beginning inventory, January 1, 2019 0
Purchases 5,600,000
Purchase returns -100,000
Goods available for sale 5,500,000
Less: Inventory, December 31, 2019 1,000,000 4,500,000 75% 70%
Gross Profit on sales 1,500,000 25% 30%

MCQ 5
Fearless Company began operations at the beginning of current year. The following information is available for the
current year:

Total merchandise purchases 7,000,000

Ending inventory 1,400,000
Collection from customers 4,000,000

All merchandise is marked to sell at 40% above cost. All sales are credit sales and all accounts are collectible.
What is the balance of accounts receivable at year-end?
A. P 1,600,000
B. P 2,440,000
C. P 3,000,000
D. P 3,840,000

SOLUTION:
Total merchandise purchases 7,000,000
Less: Ending inventory 1,400,000
Cost of sales 5,600,000
Multiply by cost rate (based on cost) 140%
Credit Sales during the year 7,840,000
Less: Collection from customers 4,000,000
Accounts receivable balance at year-end 3,840,000

MCQ 6
Fairy Company provided the following information:
2019 2020
Sales 7,500,000 4,500,000
Beginning inventory 1,260,000
Purchases 6,450,000 3,180,000
Freight-in 350,000 220,000
Purchase Discounts 90,000 45,000
Purchase Returns 120,000 40,000
Purchase Allowances 20,000 15,000
Ending inventory 2,355,000

What is the inventory on December 31, 2020?

A. P 2,370,000
B. P 2,025,000
C. P 3,285,000
D. P 2,505,000

SOLUTION:
Beginning inventory, January 1, 2020 2,355,000
Add: Net Purchases
Purchases 3,180,000
Freight-in 220,000
Purchase discounts -45,000
Purchase returns -40,000
Purchase allowances -15,000 3,300,000
Goods available for sale 5,655,000
Less: Cost of Sales
Sales 4,500,000
Multiply by cost rate (based on sales) 73% 3,285,000
Inventory, December 31, 2020 2,370,000

Supporting computation:
Sales 7,500,000 100%
Less:Cost of Sales
Beginning inventory, January 1, 2019 1,260,000
Add: Net Purchases
Purchases 6,450,000
Freight-in 350,000
Purchase discounts -90,000
 Purchase returns -120,000
Purchase allowances -20,000 6,570,000
Goods available for sale 7,830,000
Less: Inventory, December 31, 2019 2,355,000 5,475,000 73%
Gross profit 2,025,000

MCQ 7
In 2020, Unanimous Company had a significant portion of inventory stolen.

The entity determined the cost of inventory not stolen to be P 100,000.

2019 2020
Purchases 5,200,000 5,000,000
Purchase Returns and Allowances 240,000 200,000
Sales 7,880,000 8,200,000
Sales Returns and Allowances 80,000 200,000
Beginning Inventory 1,200,000 2,000,000

What is the estimated cost of stolen inventory?

A. P 700,000
B. P 600,000
C. P 644,000
D. P 144,000

SOLUTION:
Beginning inventory, January 1, 2020 1,200,000
Add: Net Purchases
Purchases 5,200,000
Less: Purchase returns and allowances 240,000 4,960,000
Goods available for sale 6,160,000
Less: Cost of Sales
Sales 7,880,000
Less: Sales returns and allowances 80,000
Net sales 7,800,000
Multiply by cost rate (based on sales) 70% 5,460,000
Inventory, December 31, 2020 700,000
Less: Inventory not stolen, December 31, 2020 100,000
Cost of stolen inventory 600,000

Supporting computation:
YEAR 2019
Sales 8,200,000
Less: Sales returns and allowances 200,000
Net Sales 8,000,000 100%

Cost of sales:
Beginning inventory, January 1, 2018 2,000,000
Purchases 5,000,000
Purchase returns and allowances -200,000
Goods available for sale 6,800,000
Less: Inventory, December 31, 2018 1,200,000 5,600,000 70%
Gross Profit on sales 2,400,000
MCQ 8
On December 31, 2020, a fire broke out in the warehouse of Regatta Company destroying all inventory. The
following data are available for the current year:

Jan-01 Dec-31
Inventory 500,000
Accounts Receivable 480,000 440,000
Accounts Payable 400,000 500,000
Collection on accounts receivables 2,640,000
Payments to suppliers 1,600,000
Goods out on consignment at sales price 200,000
Salvage value of inventory 20,000

2019 2018 2017

Sales 2,800,000 2,700,000 2,500,000
Gross profit 1,260,000 1,080,000 860,000

. What is the amount of purchases for the current year?

A. P 1,700,000
B. P 1,600,000
C. P 1,500,000
D. P 2,100,000

SOLUTION:
Accounts Payable
Debit Credit
Accounts Payable, January 1, 2020 400,000
Purchases during 2020 (squeeze) 1,700,000
Payments to suppliers 1,600,000

Accounts Payable, December 31, 2020 500,000

Accounts Payable, December 31, 2020 500,000

Payments to suppliers 1,600,000
Accounts Payable, January 1, 2020 -400,000
Purchases during 2020 (squeeze) 1,700,000

. What is the amount of sales for the current year?

A. P 2,600,000
B. P 2,680,000
C. P 2,640,000
D. P 2,200,000

SOLUTION:
Accounts Receivable
Debit Credit
Accounts Receivable, January 1, 2020 480,000
Sales during 2020 (squeeze) 2,600,000
Collection of accounts 2,640,000

Accounts Receivable, December 31, 2020 440,000

 Accounts Receivable, December 31, 2020 440,000
Collection of accounts 2,640,000
Accounts Receivable, January 1, 2020 -480,000
Sales during 2020 (squeeze) 2,600,000

. What is the inventory fire loss on December 31, 2020?

A. P 600,000
B. P 420,000
C. P 508,000
D. P 500,000

SOLUTION:
Beginning inventory, January 1, 2019 500,000
Purchases (No. 1) 1,700,000
Goods available for sale 2,200,000
Less: Cost of Sales
Sales 2,600,000
Multiply by cost rate (based on sales) 60% 1,560,000
Inventory, December 31, 2019 640,000
Less: Goods out on consignment (at cost)
(P 200,000 x 60%) 120,000
Salvage value of inventory 20,000 140,000
FIRE LOSS 500,000

Supporting computation:
2019 2018 2017 Total %
Sales 2,800,000 2,700,000 2,500,000 8,000,000
Gross profit 1,260,000 1,080,000 860,000 3,200,000
Cost of Sales 4,800,000 60%

MCQ 9
On December 31, 2019, Frenzy Company had a fire which completely destroyed the goods in process inventory. A
physical inventory was taken after the fire.

Dec-31 Jan-01
Finished goods 4,500,000 6,000,000
Goods in process 0 4,300,000
Raw materials 2,000,000 1,700,000
Factory supplies 400,000 500,000

During the year, the entity reported sales P 20,000,000, purchases P 3,800,000, freight P 200,000, direct labor P
5,000,000 and manufacturing overhead at 60% of direct labor. The average gross profit rate is 30% on sales.

. What is the cost of raw materials used?

A. P 5,700,000
B. P 3,700,000
C. P 3,800,000
D. P 3,600,000

SOLUTION:
Raw materials, January 1 1,700,000
 Purchases 3,800,000
Freight-in 200,000
Raw materials, December 31 -2,000,000
Raw materials used 3,700,000

. What is the total manufacturing cost?

A. P 13,000,000
B. P 11,800,000
C. P 11,700,000
D. P 11,600,000

SOLUTION:
Raw materials used 3,700,000
Direct labor cost 5,000,000
Manufacturing overhead
(P 5,000,000 x 60% of DL cost) 3,000,000
Total manufacturing costs 11,700,000

. What is the cost of goods sold?

A. P 12,000,000
B. P 16,000,000
C. P 13,000,000
D. P 14,000,000

SOLUTION:
Sales 20,000,000
Multiply by cost rate (based on sales) 70%
Cost of goods sold 14,000,000

. What is the cost of goods in process destroyed by fire?

A. P 3,500,000
B. P 3,800,000
C. P 2,500,000
D. P 1,500,000

SOLUTION:
Total manufacturing costs (No. 2) 11,700,000
Goods in process, January 1 4,300,000
Cost of goods placed in process of production 16,000,000
Less: Cost of goods manufactured:
Cost of sales (No. 3) 14,000,000
Finished goods, December 31 4,500,000
Finished goods, January 1 -6,000,000 12,500,000
Goods in process destroyed by fire 3,500,000

MCQ 10
Sublime Company showed the following information at year-end:

COST RETAIL
Beginning inventory 280,000 700,000
Sales 5,000,000
 Purchases 2,480,000 5,160,000
Freight-in 75,000
Mark-up 500,000
Mark-up cancelation 60,000
Markdown 250,000
Markdown cancelation 50,000
Estimated normal shrinkage is 2% of sales

The entity used the conservative retail inventory method in estimating the value of inventory.

What is the estimated cost of ending inventory?

A. P 460,000
B. P 450,000
C. P 495,000
D. P 506,000

SOLUTION:

COST RETAIL %
Beginning inventory 280,000 700,000
Purchases 2,480,000 5,160,000
Freight-in 75,000
Mark-up 500,000
Mark-up cancelation -60,000
GAFS - Conservative 2,835,000 6,300,000 45%
Markdown -250,000
Markdown cancelation 50,000
Goods Available for Sales 2,835,000 6,100,000

Sales -5,000,000
Estimated normal shrinkage is 2% of sales
(P 5,000,000 x 2%) -100,000
Estimated ending inventory, at retail 1,000,000

Estimated ending inventory at cost

(P 1,040,000 x 45%) 450,000

MCQ 11
Abscond Company used the retail inventory method to estimate inventory for interim statement purposes.

The entity provided the following information for the current year:

COST RETAIL
Beginning inventory 700,000 1,000,000
Purchases 4,100,000 6,300,000
Mark-up 700,000
Markdown 500,000
Sales 5,900,000
Normal shoplifting losses 100,000

Under the average cost approach, what is the estimated cost of ending inventory?
A. P 1,500,000
B. P 1,024,000
C. P 960,000
D. P 900,000

SOLUTION:
COST RETAIL %
Beginning inventory 700,000 1,000,000
Purchases 4,100,000 6,300,000
Mark-up 700,000
Markdown -500,000
Goods available for sale 4,800,000 7,500,000 64%
Less: Sales -5,900,000
Normal shoplifting losses -100,000
Estimated ending inventory, at retail 1,500,000

Estimated ending inventory at cost

(P 6,810,000 x 64%) 960,000

MCQ 12
Bouquet Company used the conventional retail inventory method to account for inventory.

COST RETAIL
Beginning inventory 6,000,000 9,200,000
Net markup 400,000
Net markdown 600,000
Sales 7,800,000

What amount should be reported as cost of goods sold?

A. P 4,800,000
B. P 4,875,000
C. P 5,200,000
D. P ,5250,000

SOLUTION:
COST RETAIL %
Beginning inventory 6,000,000 9,200,000
Net markup 400,000
GAFS - Conventional 6,000,000 9,600,000 62.5%
Less: Net markdown 600,000
Goods available for Sale 6,000,000 9,000,000
Less: Sales 7,800,000
Estimated ending inventory, at retail 1,200,000

Estimated ending inventory, at cost

(P 1,200,000 x 62.5%) 750,000

Goods available for Sale 6,000,000

Less: Estimated ending inventory 750,000
Cost of goods sold 5,250,000

MCQ 13
At the beginning of current year, Cavalier Company reported inventory of P 1,000,000 at retail and P 560,000 at cost.
During the current year, the entity registered the following purchases:

Cost 4,000,000
Retail Price 6,200,000
Original Mark-up 2,200,000

The net sales totaled P 5,400,00. The following reductions were made in the retail price.

To meet price competition 50,000

To dispose of overstock 30,000
Miscellaneous reductions 120,000

During the current year, the selling price of a certain inventory increased from P 200 to P 300.

The additional mark-up applied to 5,000 items but it was later cancelled on the remaining 1,000 items.

What is the ending inventory using the average cost approach in applying the retail method?
A. P 2,000,000
B. P 2,400,000
C. P 1,240,000
D. P 1,200,000

SOLUTION:
COST RETAIL %
Beginning inventory 560,000 1,000,000
Purchases 4,000,000 6,200,000
Mark-up [5,000 x (P 300 - P 200)] 500,000
Mark-up cancellation [1,000 x (P 300 - P 100)] -100,000
Markdown -200,000
Goods available for Sale - average 4,560,000 7,400,000 62%
Less: Sales 5,400,000
Estimated ending inventory, at retail 2,000,000

Estimated ending inventory, at cost

(P 2,000,000 x 62%) 1,240,000

MCQ 14
Fainthearted Company provided the following information for the current year:

COST RETAIL
Beginning inventory 750,000 1,000,000
Purchases 4,150,000 5,800,000
Additional mark-up 200,000
Available for sale 4,900,000 7,000,000

Sales for the year totaled P 5,500,000. Markdown amounted to P 100,000.

Under the average cost approach in applying the retail method, what is the estimated cost of inventory?
A. P 1,050,000
B. P 1,400,000
C. P 994,000
D. P 980,000

SOLUTION:
COST RETAIL %
 Beginning inventory 750,000 1,000,000
Purchases 4,150,000 5,800,000
Additional mark-up 200,000
Markdown -100,000
Available for sale 4,900,000 6,900,000 71%
Less: Sales 5,500,000
Estimated ending inventory, at retail 1,400,000

Estimated ending inventory, at cost

(P 1,400,000 x 71%) 994,000

MCQ 15
Airborne Company used the average cost retail inventory method.

COST RETAIL
Beginning inventory 1,650,000 2,200,000
Net Purchases 3,725,000 4,950,000
Departmental transfer - credit 200,000 300,000
Net markup 150,000
Inventory shortage - sales price 100,000
Employee discounts 200,000
Sales, including sales of P 400,000 of items
which were marked down from P 500,000 4,000,000

What is the estimated cost of ending inventory?

A. P 1,950,000
B. P 2,600,000
C. P 1,924,000
D. P 2,250,000

SOLUTION:
COST RETAIL %
Beginning inventory 1,650,000 2,200,000
Net Purchases 3,725,000 4,950,000
Departmental transfer - credit -200,000 -300,000
Net markup 150,000
Markdown (P 500,000 - P 400,000) -100,000
GAFS - Average cost method 5,175,000 6,900,000 75%
Less: Sales -4,000,000
Inventory shortage - sales price -100,000
Employee discounts -200,000
Estimated ending inventory, at retail 2,600,000

Estimated ending inventory, at cost

(P 2,700,000 x 75%) 1,950,000
(100% - 30%)
5% higher than in 2019