ACT112 – Intermediate Accounting 1

2nd Semester 2022-2023

Inventory Exercises
April 27, 2023

1. Goods were in transit from a vendor to ABCD on December 31, 2023. The invoice price was P100,000, and
the goods were shipped FOB shipping point on December 29, 2023. The goods were received on January
4, 2024. Since the goods were not received as at the end of 2023, inventory should not be included but
ABCD is liable to the vendor because the goods were shipped FOB shipping point. (TRUE or FALSE)
2. Goods shipped to XYZ FOB shipping point on December 20, 2023, from a vendor were lost in transit. The
invoice price was P50,000. On January 5, 2024, XYZ filed a P50,000 claim against the common carrier. XYZ
is still liable to vendor amounting to P50,000. (TRUE or FALSE)
3. Goods shipped f.o.b. destination on December 21, 2021 from a vendor to Cristobal were received on January
6, 2022. The invoice cost was P25,000. The purchasing company is not liable to the seller because title of
the goods is not yet transferred to the former. (TRUE or FALSE)
4. On August 1, JKL Company recorded purchases of inventory of P80,000 and P100,000 under credit terms
of 2/15, net 30. The payment due on the P80,000 purchase was remitted on August 14. The payment due
on the P100,000 purchase was remitted on August 29. Under the net method and the gross method, these
purchases should be included at what respective net amounts in the determination of cost of goods available
for sale?
• Net Method
• Gross Method
5. QRST Co. records purchases at net amounts. On May 5 QRST purchased merchandise on account,
P32,000, terms 2/10, n/30. QRST returned P2,000 of the May 5 purchase and received credit on account. At
May 31 the balance had not been paid. The amount to be recorded as a purchase return is
6. Torres Retailers purchased merchandise with a list price of P90,000, subject to trade discounts of 20% and
10%, with no cash discounts allowable. Torres should record the cost of this merchandise as
7. On June 1, 2023, HIJK Corp. sold merchandise with a list price of P30,000 to Linn on account. HIJK allowed
trade discounts of 30% and 20%. Credit terms were 2/15, n/40 and the sale was made f.o.b. shipping point.
HIJK prepaid P600 of delivery costs for Linn as an accommodation. On June 12, 2021, HIJK received from
Linn a remittance in full payment amounting to
8. TVs shipped to a customer January 2, 2024, costing P5,000 were included in inventory at December 31,
2023. The sale was recorded in 2023. Determine the account that is overstated.
9. TVs costing P10,000 received December 30, 2023, were recorded as paid on January 2, 2024. Physical
count of inventory was made on December 31, 2023. Determine the impact to profit or loss due to mistake
committed assuming the company uses the periodic method of recording.

10. ABC Company sells TVs. The perpetual inventory was stated as P28,500 on the books at December 31,
2013. At the close of the year, a new approach for compiling inventory was used and apparently, a
satisfactory cut-off for preparation of financial statements was not made. Some events that occurred are as
follows.
A. TVs shipped to a customer January 2, 2014, costing P5,000 were included in inventory at December
31, 2013. The sale was recorded in 2014.
B. TVs costing P12,000 received December 30, 2013, were recorded as received on January 2, 2014.
C. TVs received during 2013 costing P4,600 were recorded twice in the inventory account.
D. TVs shipped to a customer December 28, 2013, f.o.b. shipping point, which cost P10,000, were not
received by the customer until January, 2014. The TVs were included in the ending inventory.
E. TVs on hand that cost P6,100 were never recorded on the books.
Compute the correct inventory at December 31, 2013.

11. In an annual audit of Tristan John Company, you find that a physical inventory on December 31, 2018,
showed merchandise with a cost of P440,000 was on hand at that date. You also find the following
transactions near the dosing date.
A. A special machine, fabricated to order for a customer casting 15,000, was finished and specifically
segregated in the back part of the shipping room on December 31, 2018. The customer was billed on
that date and the machine excluded from inventory although it was shipped on January 4, 2019.
 B. Merchandise costing P3,000 was received an January 3, 2019, and the related purchase invoice
recorded January 5. The invoice showed the equipment was made on December 29, 2018, f.o.b.
destination.
C. A packing case containing a product costing P34,000 was standing in the shipping room when the
physical inventory was taken. It was not included in the inventory because it was marked "hold for
slipping instructions". Your investigation revealed that the customer's order was dated December 18,
2018 but that the case was shipped and the customer billed on January 10, 2019.
D. Merchandise received on January 6, 2019, costing P6,000 was entered in the purchase journal on
January 3, 2019. The invoice showed shipment was made f.o.b. supplier’s warehouse on December
31, 2018.
E. Merchandise costing P7,000 was received on December 28, 2018, and the invoice was not recorded.
You located it in the hands of the purchasing agent and it was marked on consignment.
The amount of inventory that should appear on the balance sheet at December 31, 2018 is

12. Listed below are some items of inventory from ABC Company that are in question during the audit. The
company stores a substantial portion of the merchandise in a separate warehouse and transfer damaged
goods to a special inventory account.
1. Items in receiving department returned by customer, no communication received from customer20,000
2. Items ordered and in receiving department, invoice not yet received from supplier 50,000
3. Items counted in warehouse by the inventory crew 70,000
4. Invoice received for goods ordered, goods shipped but not received
(ABC Company pays freight) 5,000
5. Items, shipped today, fob destination, invoice mailed to customer 5,000
6. Items currently used for window displays 10,000
7. Items on counter for sale per inventory count [not in (3)] 90,000
8. Items in shipping department, invoice not mailed to customer 6,000
9. Items in receiving department, refused by ABC because of damage [(not in (3)] 3,000
10. Items shipped today, fob shipping point, invoice mailed to customer 4,000
11. Items included in warehouse count, damaged, not returnable 8,000
12. Items included in warehouse count, specifically crafted and segregated for shipment to
customer in five days per sales contract, with return privilege. 18,000
If the recorded inventory in the balance sheet is P289,000, the year-end inventory will be overstated by:

(Use the following information to answer the next 2 requirements.)

Reese Co. prepares monthly income statements. Inventory is counted only at year end; thus, month-end
inventories must be estimated. All sales are made on account. The rate of mark-up on cost is 30%. The following
information relates to the month of May.
Accounts receivable, May 1 P20,000
Accounts receivable, May 31 27,000
Collections of accounts during May 84,000
Inventory, May 1 45,000
Purchases during May 65,000
13. Calculate the amount of sales on May 31.
14. Calculate the estimated cost of the inventory on May 31.

15. The ABC Music Company was formed on December 1, 2022. The following information is available from
ABC's inventory records:
Units Unit Cost
Balance at January 1, 2023 4,800 P14.25
Purchases:
January 17, 2023 9,000 15.00
March 12, 2023 7,200 16.50
June 23, 2023 3,600 15.75
November 15, 2023 5,400 17.25
The company uses a periodic inventory system, and a physical inventory on November 30, 2023, shows
9,600 units on hand. Compute the ending inventory at November 30, 2023, under average cost.

16. ABC Corporation sells item A as part of its product line. Information as to balances on hand, purchases, and
sales of item A are given in the following table for the first six months of 2023.
 Quantities Unit Price
Date Purchased Sold Balanceof Purchase
January 11 — — 300 P2.50
January 24 1,300 — 1,600 P2.60
February 8 — 300 1,300 —
March 16 — 760 540 —
June 11 600 — 1,140 P2.80
Compute the cost of goods sold for the first six months under the periodic FIFO inventory pricing method.

17. Northstar Sales Corp. was organized on January 1, 2023. On December 31, 2024, the company lost most of
its inventory in a warehouse fire just before the year-end count of inventory was to take place. Data from the
records disclosed the following:
2023 2024
Inventory, January 1 ....................... P 0 P173,120
Purchases during year ...................... 860,000 692,000
Purchase returns and allowances during year 46,120 64,600
Sales during year .......................... 788,000 836,000
Sales returns and allowances during year ... 16,000 20,000
On January 1, 2024, Northstar's pricing policy was changed so that the gross profit rate would be 3
percentage points higher than the one earned in 2023. Salvaged undamaged merchandise was marked to
sell at P24,000, while damaged merchandise marked to sell at P16,000 had an estimated net realizable value
of P3,600. Determine the company's inventory loss due to the fire that occurred on December 31, 2024.

18. On May 17, it was discovered that a material amount of inventory had been stolen. A physical count discloses
that P55,000 of merchandise was on hand as of May 17. The following additional data is available from the
accounting records:
Inventory, January 1 ................................... P 62,000
Purchases, January 1 - May 17 (includes P4,000 shipped
FOB shipping point May 16, received May 19) .......... 114,000
Sales (goods delivered to customers), January 1 - May 17 90,000
Records indicate that the company's gross profit has averaged 40 percent of selling prices. Estimate the
amount of loss due to theft.

(Use the following information to answer the next 2 requirements.)

ABC Co., a manufacturer, had inventories at the beginning and end of its current year as follows:
Beginning End
Raw materials P11,000 P15,000
Work in process 20,000 24,000
Finished goods 12,500 9,000
During the year, the following costs and expenses were incurred:
Raw materials purchased P150,000
Direct labor cost 60,000
Indirect factory labor 30,000
Taxes and depreciation on factory building 10,000
Taxes and depreciation on sales room and office 7,500
Sales salaries 20,000
Office salaries 12,000
Utilities (60% applicable to factory, 20% to sales room,
and 20% to office) 25,000
19. ABC's cost of goods sold for the year is
20. Overhead cost

(Use the following information to answer the next 2 requirements.)

The following data pertain to the current year of Leakage Company:
Inventory – January 1:
Cost 5,000,000
Net realizable value 4,500,000
Net purchases 20,000,000
Inventory – December 31:
 Cost 6,000,000
Net realizable value 5,300,000
21. What is the allowance for inventory write down at the end of the year?
22. Compute the cost of sales.

(Use the following information to answer the next 2 requirements.)

The company is committed to purchase agricultural products at a contract purchase price of P500,000. The
replacement cost at year end is P450,000.
23. If the replacement cost of the purchase commitment is P600,000 when the actual purchase was made,
prepare the entry to record the purchase.
24. If the replacement cost of the purchase commitment is P420,000 when the actual purchase was made,
prepare the entry to record the purchase.

(Use the following information to answer the next 2 requirements.)

When you undertook the preparation of the financial statements for ABC Company at January 31, 2023, the
following data were available:
At Cost At Retail
Inventory, February 1, 2022 P72,800 P 98,500
Markdowns 35,000
Markups 73,000
Markdown cancellations 20,000
Markup cancellations 10,000
Purchases 219,500 294,000
Sales 325,000
Purchases returns and allowances 4,300 5,500
Sales returns and allowances 10,000
25. Compute the cost ratio to be used (approximates lower of cost or market) in computing the ending
inventory.
26. Compute the ending inventory at cost as of January 31, 2023, using the retail method which approximates
lower of cost or market.

27. ABC Co. uses the retail inventory method to estimate its inventory for interim statement purposes. Data
relating to the computation of the inventory at July 31, 2023, are as follows:
Cost Retail
Inventory, 2/1/13 P 400,000 P 500,000
Purchases 2,400,000 3,150,000
Markups, net 350,000
Sales 3,400,000
Estimated normal shoplifting losses 40,000
Markdowns, net 220,000
Under the lower of cost or market method, ABC's estimated inventory at July 31, 2023 is

28. At December 31, 2023, the following information was available from ABC Co.'s accounting records:
Cost Retail
Inventory, 1/1/13 P147,000 P 205,000
Purchases 833,000 1,155,000
Additional markups 40,000
Available for sale P980,000 P1,400,000
Sales for the year totaled P1,200,000. Markdowns amounted to P10,000. Under the lower of cost or market
method, ABC's inventory at December 31, 2023 was

29. ABC 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 cancellation 60,000
 Markdown 250,000
Markdown cancellation 50,000
Estimated normal shrinkage is 2% of sales

The entity used the retail inventory method is estimating the value of inventory.
1. Compute the estimated cost of ending inventory under conservative approach.
2. Compute the cost of sales under average approach.
3. What is the estimated cost of ending inventory at approximate lower of average cost and net realizable
value.

30. ABC provided the following information:

2024 2025
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
4. How much is the cost of sales in 2024.
5. Compute the inventory at the end of 2025.

31. For each of the independent events listed below, analyze the impact on the indicated items at the end of
the current year by placing the appropriate code letter in the box under each item.
Code: O = item is overstated
U = item is understated
NA = item is not affected
Items
Events Owner’s Cost of Net
Assets Equity Goods Sold Income
1. A physical count of goods on hand at the end of the
current year resulted in some goods being counted
twice.
2. The ending inventory in the previous period was
overstated.
3. Goods purchased on account in December of the
current year and shipped FOB shipping point were
recorded as purchases, but were not included in the
count of goods on hand on December 31 because they
had not arrived by December 31.
4. Goods purchased on account in December of the
current year and shipped FOB destination were
recorded as purchases, but were not included in the
count of goods on hand on December 31 because they
had not arrived by December 31.
5. The internal auditors discovered that the ending
inventory in the previous period was understated
P15,000 and that the ending inventory in the current
period was overstated P25,000.

32. ABC's Hardware Store prepared the following analysis of cost of goods sold for the previous three years:
2022 2023 2024
Beginning inventory 1/1 P40,000 P18,000 P25,000
Cost of goods purchased 50,000 55,000 70,000
Cost of goods available for sale 90,000 73,000 95,000
Ending inventory 12/31 18,000 25,000 40,000
Cost of goods sold P72,000 P48,000 P55,000
Net income for the years 2022, 2023, and 2024 was P70,000, P60,000, and P55,000, respectively. Since net
income was consistently declining, Mr. ABC hired a new accountant to investigate the cause(s) for the declines.

The accountant determined the following:

1. Purchases of P25,000 were not recorded in 2022.
2. The 2022 December 31 inventory should have been P24,000.
3. The 2023 ending inventory included inventory costing P5,000 that was purchased FOB destination and in
transit at year end.
4. The 2024 ending inventory did not include goods costing P4,000 that were shipped on December 29 to
Sampson Plumbing Company, FOB shipping point. The goods were still in transit at the end of the year.
Determine the correct net income for each year.

33. The ABC COMPANY’S year-end inventory based on physical count conducted on December 31, 2018,
amounted to P885,000. Your cut-off examination disclosed the following information”:
A. Included in the physical count were goods billed to customer FOB shipping point on December 31,
2018. These goods had a cost of P28,000 and were billed at P35,000. The shipment was on ABC’S
loading dock waiting to be picked up by the common carrier.
B. Goods were in transit from a vendor to ABC on December 31, 2018. The invoice cost was P50,000
and the goods were shipped FOB Shipping on Dec. 29,2018.
C. Work in process inventory costing P20,000 was sent to an outside processor for plating on Dec. 30,
2018.
D. Goods returned by customers and held pending inspection in the returned goods area on Dec. 31,
2018, were not included in the physical count. On January 8, 2019, the goods costing P26,000 were
inspected and returned to inventory. Credit memos totaling P40,000 were issued.
E. Goods shipped to customer FOB destination on Dec. 26, 2018, were in transit at Dec. 31, 2018 and
had a cost of P25,000. Upon notification of receipt by the customer on January 2, 2019, the company
issued a sales invoice for P42,000.
F. Goods received from a vendor on Dec. 26, 2018, were included in the physical count. However, the
related P60,000 vendor invoice was not included in Accounts Payable as December 31, 2018,
because the Accounts Payable copy of the receiving report was lost.
G. On January 3, 2019, a monthly freight bill in the amount of P4,000 was received. This was specifically
related to merchandise purchased in Dec. 31, 2018. The freight charges were not included in either
the inventory or in accounts payable at Dec. 31, 2018.

1. Sales at year-end is overstated by:

2. Purchases at year-end is understated by:
3. Cost of sales at year-end is overstated by:
4. The inventory per audit at year-end is: