5-1 Light company is a wholesaler of scented candles.

The activity for item number 1234 during June is

presented below:

Date Transaction Units Cost

1-Jun Inventory balance 6,000 20
4 Purchases 9,000 24
10,80
12 Sales 0
14,40
19 Purchases 0 26
11,40
22 Sales 0
29 Purchases 4,800 27

Question 1: Under the FIFO periodic inventory system, how much is the ending inventory of item #1234
at June 30?

Answer: 316,800

Solution:

Total units available for sale (beginning plus

purchases) 34,200
Less: Units sold 22,200
Number of units at the of the month 12,000

FIFO - upward accountability of units

(Starting from latest acquisition then upward)

Units Unit cost Cost

187,20
From June 19 balance 7,200 x 26 0
129,60
From June 29 purchases 4,800 x 27 0
316,80
Ending inventory 12,000 0

PAS 2, paragraph 27 states that FIFO formula assumes that the items of inventory that were purchased
or produced first are sold first and consequently the items remaining in inventory at the end of the
period are those most recently purchased or produced

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 Question 2: Under the weighted average cost periodic inventory system, how much is the ending
inventory of item #1234 at June 30?

Answer: 294,720

Solution:

Units Cost per unit Total cost

Inventory,
beginning 6,000 20 120,000
Purchases:
4-Jun 9,000 24 216,000
14,40
19-Jun 0 26 374,400
29-Jun 4,800 27 129,600
34,20
Total 0 840,000

Average unit cost = 840,000 /

34,200 24.56

Total units available for sale 34,200

Less: units sold (10,800 + 11,400) 22,200

Units end 12,000

294,72
Inventory, June 30 (12,000 x 24.56) 0

Pas 2 paragraph 27 states that, Under the weighted average cost formula, the cost of each item is
determined from the weighted average of the cost of similar items at the beginning of a period and cost
of similar items purchased or produced during the period. The average may be calculated on a periodic
basis, or as each additional shipment is received, depending upon the circumstances of the entity.

5-2 During January 2014, Metro Company, which maintains a perpetual inventory system, recorded the
following information pertaining to its inventory:

Units Unit cost Total cost Units on hand

Balance on 01/01/14 1,000 40 40,000 1,000
Purchased on 01/04/14 600 120 72,000 1,600
Sold on 01/20/14 900 700
Purchased on 01/25/14 400 200 80,000 1,100

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 Question: Under the moving-average method, what amount should Metro report as inventory at January
31, 2014?

Answer: 129,000

Solution:

Total cost prior to the sale

From beginning 40,000
Purchases 72,000 112,000
Less: Cost of units sold (112,000/1,600 x
900) 63,000
Balance after the sale 49,000
Purchases, January 25, 2014 (400 x 200) 80,000
Total inventory, end 129,000

5-3 Generic Company, organized in 2012 has used the FIFO method of inventory valuation. Net income
reported under this method is shown below:

2012 2013 2014

Net Income 180,000 250,000 350,000
Inventory end:
Average 600,000 750,000 1,000,000
FIFO 620,000 1,000,000 1,200,000

Question: If the FIFO method of inventory valuation was used, how much would be the total net income
for the three years?

Answer: 980,000

Solution:

Combined net income at Average 780,000

*(180,000 + 250,000 + 350,000)
Change (increase) in inventory, 2014 (1,200,000 -
1,000,000) 200,000
Net Income at FIFO 980,000

The change in inventory for 2012 and 2013 no longer affects the combined income

5-4 Focus Company recorded the following data pertaining to its raw materials during January 2014:

Date Received Cost Issued On hand

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 January 1, 2014 - Inventory 8 3,200 units
January 11, 2014 - Issue 1,600 units 1,600 units
January 22, 2014 - Purchase 4,800 units 9.6 6,400 units

Question: How much is the moving-average cost of the raw materials inventory at January 31, 2014?

Answer: 9.20

Solution:

Cost Units
January 1, 2014 inventory (8 x 3,200 units) 25,600 3,200
January 11, 2014 issuance (8 x 1,600 units) -12,800 -1,600
Balance 12,800 1,600
January 22, 2014 purchase (9.60 x 4,800 units) 46,080 4,800
Total 58,880 6,400

Average cost/Unit cost (58,800/6,400) 9.20

5-5 White Farm Supply’s records for the first 3 months of its existence show purchases of Commodity A
as follows:

No. of Units Cost

280,5
August 5,500 00
Septemb 416,0
er 8,000 00
270,3
October 5,100 00
966,8
Total 18,600 00

The inventory of Commodity A at the end of October using FIFO is valued at 363,900

Question: Assuming that none of Commodity A was sold during August and September, what value
would be shown at the end of October if average cost was assumed?

Answer: 358,662

Solution:

FIFO Cost Unit cost Units

Inventory, end 363,900 **6,900
Less: Oct purchases 270,300 5,100

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 Excess Sept purchases 93,600 / 52* 1,800

*Unit cost of September = 416,000/8,000 units = 52

**Units in the ending inventory = Units identified from October purchases (5,100) plus units identified
from September (1,800) = 6,900

Average unit cost = 966,800 total cost / 18,600 total units = 51.98

Inventory, end (Average) = 6,900 x 51.98 = 358,662

5-6 The Savior Corporation uses the lower of cost or net realizable value inventory. Data regarding the
items in work-in-process inventory are presented below:

Marker
s Pens
Historical cost 24,000 18,800
Selling price 36,000 21,800
Estimated cost to complete 4,800 4,800
Replacement cost 20,800 16,800
Normal profit margin as a percentage of selling
price 25% 25%

Question 1: What is the amount of markers inventory to be reported in Savior’s statement of financial
position?

Answer: 24,000

Solution:

Cost 24,000
NRV
36,00
Selling Price 0
Less: Estimated cost to complete 4,800 31,200

Question 2: What is the amount of pens inventory to be reported in Savior’s statement of financial
position?

Answer: 17,000

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 Solution:

Cost 18,880
NRV
21,80
Selling Price 0
Less: Estimated cost to complete 4,800 17,000

5-7 The Moonlight Corporation applies the lower of cost or net realizable value (NRV) inventory. Data
regarding the items in work-in-process inventory are shown below:

Shorts Pants
Historical cost 56,640 90,000
108,80
selling prices 0 108,000
Estimated cost to complete 14,400 20,400
Replacement cost 50,400 95,400
Normal profit margin as a percentage of selling price 25% 10%

Question: Under the lower of cost or NRV rule, the pants should be valued at –

Answer: 87,600

Solution:

Cost 90,000
Net Realizable Value
Selling price 108,000
Less: Estimated cost to
complete 20,400 87,600

PAS 2, paragraph 28 states that Net Realizable Value is the estimated selling price in the ordinary course
of business less the costs of completion and the estimated costs necessary to make the sale. The cost of
inventories may not be recoverable if those inventories are damaged, if they have become wholly or
partially obsolete, or if their selling prices have declined. The cost of inventories may not also be
recoverable if the estimated costs of completion or the estimated costs to be incurred to make the sale
have increased. The practice of writing inventories down below cost to net realizable value (NRV) is
consistent with the view that assets should not be carried in excess of the amount, which can be
expected to be realized from their sale or use.

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 5-8 The closing inventory of Gender Company amounted to 284,000 at December 31, 2014. This total
includes two inventory lines about which the inventory taker is uncertain.

Item 1 – 500 items which had cost 15 each and which were included at 7,500. These items were found to
have been defective at the balance sheet date. Remedial work after the balance sheet date cost 1,800
and they were then sold for 20 each. Selling expenses were 400

Item 2 – 100 items that had cost 10 each but after the balance sheet date, these were sold for 8 each
with selling expenses of 150

Question: What figure should appear in Gender’s statement of financial position for inventory?

Answer: 283,650

Solution:

284,00
Inventory per book 0
Item 1 - no adjustment
Item 2 (100 x 10 = 1,000)
(100 x 8 = 800)
(1,000 – 800 = 200)
(200 + 150 = 350) -350
Adjusted value of 283,65
inventory 0

Item 1 has a net realizable value 7,800 ( 500 x 20 – 1800 – 400) which is higher than the historical cost,
therefore reported inventory is not adjusted. The net realizable value of item 2 is lower than its cost by
350 (100 x 8 – 150 = 650 vs cost of 1,000), therefore, inventory should be reduced by 350.

PAS 10, paragraph 9 states in part that the receipt of information after the balance sheet date indicating
that an asset was impaired at the balance sheet date, or that the amount of a previously recognized
impairment loss for that asset needs to be adjusted. For instance, the sale of inventories after the
balance sheet date may give evidence about their net realizable at the balance sheet date is an example
of adjusting events after the balance sheet date that require an entity to adjust the amount recognized
in its financial statements, or to recognize items that were not previously recognized.

5-9 The closing inventory of Colossal Company amounted to 116,400 excluding the following two
inventory lines:

Item 1 – 400 items, which had cost 40 each. All were sold after the balance sheet date for 30 each, with
selling expenses of 2,000 for the batch

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 Item 2 – 200 different items, which had cost 30 each. These items were found to be defective at the
balance sheet date. Rectification work after the balance sheet date amounted to 1,200, after which they
were sold for 35, with selling expenses totally 300.

Question: What figure should appear in the statement of financial position of Colossal Company?

Answer: 131,900

Solution:

116,40
Reported amount of inventory 0
Item 1 (LCNRV)
16,00
Cost (400 x 40) 0
10,00
NRV (400 x 30 - 2,000) 0 10,000

Item 2 (LCNRV)
Cost (200 x 30) 6,000
NRV (200 x 35 - 1,200 - 300) 5,500 5,500

131,90
Adjusted value of inventory 0

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