Accounting Group Tutorial

Inventories Exercises - Answers

Exercise 1
YES/NO: YES if the items are included in your inventory and NO if not.
__1. Items specifically segregated per sale in contract.
__2. Items in receiving department, returned by customer in good condition.
__3. Items shipped today, invoice mailed, FOB shipping point.
__4. Items being used for window display.
__5. Items on counter for sale.
__6. Goods in process.
__7. Goods in the hands of consignees.
__8. Finished goods in transit to customer, FOB destination.
__9. Office supplies.
__10. Defective materials returned to supplier.

Answer:
1. No
2. Yes
3. No
4. Yes
5. Yes
6. Yes
7. Yes
8. Yes
9. No
10. No

Exercise 2
Kazuha Company’s December 31, 2020 year end financial contained the following error:
A. Goods costing P3,000 that Kazuha was holding as a consignee were included in the
physical count on December 31
B. An invoice for goods costing P4,600 was received and entered as a credit purchase on
December 29. The goods arrived on January 2. The supplier the goods FOB destination
on December 27.
C. Goods costing P800 and housed in a special room were inadvertently overlooked when
the physical count was taken.
For each independent error, indicate whether the account is U=understated, O= overstated,
NE=No Effect

A B C
2020 2021 2020 2021 2020 2021
Inventory, beg
Purchases
Inventory, end
Net Income
Retained Earnings, beg
Retained Earnings, end

Answer:

A B C
2020 2021 2020 2021 2020 2021
Inventory, beg NE O NE NE NE U
Purchases NE NE O O NE NE
Inventory, end O NE NE NE U NE
Net Income O U O U U O
Retained Earnings, beg NE O NE O NE U
Retained Earnings, end O NE O NE U NE

Exercise 3
Brilliant Company has incurred the following costs during the current year:

Cost of purchases based on vendor’s invoices P 5,000,000

Trade discounts already deducted from invoice 500,000
Import Duties 400,000
Freight and Insurance on purchases 1,000,000
Other handling costs relating to imports 100,000
Salaries of Accounting department 600,000
Brokerage commission paid to agents for arranging imports 200,000
Sales Commission paid to sales agents 300,000
After-sales warranty costs 250,000

Answer:
Cost of purchases based on vendor’s invoices P 5,000,000
Import Duties 400,000
Freight and Insurance on purchases 1,000,000
Other handling costs relating to imports 100,000
Brokerage commission paid to agents for arranging imports 200,000
TOTAL COST OF PURCHASES P 6,700,000
Exercise 4
Magdalena Company is a wholesaler of perfume. The activity for product Lomon during June is
presented below:

Date Transaction Units Selling Price Unit Cost

1 Beginning Inventory 240 1,075
4 Purchases 190 1,135
12 Sales 220 1,200
19 Purchases 380 1,180
22 Sales 360 1,250
27 Purchases 200 1,200

a. Under FIFO method, how much is the ending inventory of product Lomon at June 30?
b. How much is the cost of goods sold under Weighted Average method?
c. How much is the gross profit under Moving Average method?

Answer:
Purchases
Date Transaction Units Unit Cost Total Cost
1 Beginning Inventory 240 1,075 258,000
4 Purchases 190 1,135 215,650
19 Purchases 380 1,180 448,400
27 Purchases 200 1,200 240,000
1,010 1,162,050
Sales
Date Units Unit Cost Total Cost
1 240 1,075 258,000
4 190 1,135 215,650

19 150 1,180 177,000

580 650,650

a. Total goods available for sale 1,162,050

Cost of goods sold (650,650)
Ending Inventory 511,400

b. Weighted Average Unit Cost = 1,162,050 / 1,010 = 1,150.54

Cost of goods sold = 1,150.54 x 580 = 667,313.20
c.
Date Units Unit Cost Total Cost
June 1 Beginning 240 1,075 258,000
June 4 Purchase 190 1,135 215,650
Balances 430 1,102 473,650
June 12 Sales (220) (242,440)
Balances 210 231,210
June 19 Purchases 380 1,180 448,400
Balances 590 1,152 679,610
June 22 Sales (360) (414,720)
Balances 230 1,152 264,890
June 27 Purchases 200 1,200 240,000
430 1,174 504,890

220 x 1,200 264,000

360 x 1,250 450,000
Total Sales 714,000
Cost of Sales (242,440)
(414,720)
Gross Profit 56,840
Problem 1
Cost NRV
Skies 2,200,000 2,500,000
Boots 1,700,000 1,500,000
Ski equipment 700,000 800,000
Ski apparel 400,000 500,000

What amount should be reported as inventory at year-end?

a. 5,000,000
b. 5,300,000
c. 4,800,000
d. 5,200,000

Answer: C. 4,800,000

COMPUTATION

Cost NRV LCNRV

Skies 2,200,000 2,500,000 2,200,000

Boots 1,700,000 1,500,000 1,500,000

Ski equipment 700,000 800,000 700,000

Ski apparel 400,000 500,000 400,000

TOTAL 5,000,000 5,300,000 4,800,000

Problem 2
REA Company provided the following information for an inventory at year-end:
Historical cost 1,200,000
Estimated selling price 1,300,000
Estimated completion and selling cost 150,000
Replacement cost 1,100,000
What amount should be reported as inventory at year-end?
a. 1,100,000
b. 1,150,000
c. 1,200,000
d. 1,300,000

Answer: B. 1,150,000

Computation:
Historical cost 1,200,000
NRV 1,300,000
(150,000) 1,150,000
LCNRV 1,150,000

Problem 3

AND Company provided the following information for the current year:
Inventory - January 1
Cost 3,000,000
NRV 2,800,000
Net purchases 8,000,000
Inventory - December 31
Cost 4,000,000
NRV 3,700,000

What amount should be reported as cost of goods sold?

a. 7,000,000
b. 7,100,000
c. 7,300,000
d. 7,200,000

Answer: B. 7,100,000
Computation under Allowance Method
Inventory - Jan. 1 @cost 3,000,000
Net purchases 8,000,000
TGAS 11,000,000
Inventory - Dec. 31 @cost (4,000,000)
COGS before write-down 7,000,000
Loss on inventory write-down 100,000
COGS after write-down 7,100,000

Required allowance - Dec. 31 4,000,000

(3,700,000) 300,000
Allowance for inventory write-down - Jan.1 3,000,000

(2,800,000) 200,000
Loss on inventory write-down 100,000

Computation under Direct Method

Inventory - Jan. 1 @NRV 2,800,000
Net purchases 8,000,000
TGAS 10,800,000
Inventory - Dec. 31 @NRV (3,700,000)
COGS 7,100,000

Gross Profit Method

. On January 1, 2022, a fire destroyed the warehouse of Afton Company including the inventories
inside. Afton Company reported the following data for the year 2021:
Inventory, Jan 1 50,000
Accounts Payable, Jan 1 5,000
Accounts Payable, Dec 31 3,000
Payments to Suppliers 30,000
Freight in 3,500
Sales 75,000
Sales return 5,500
Sales discount 2,000
Gross Profit Rate based on the cost of goods 20%
sold
Goods in Transit on December 31 amounted to 3,000 while goods out on consignment were
2,000. Damaged materials can be sold at a salvage value of 800.
1. Determine the Total Net Purchases.
2. What is the total Ending Inventory?
3. Compute the total loss due to fire.

Answer:
1. Determine the Total Net Purchases. 28,000
2. Compute the Total COGS. 57,914.35
3. What is the total Ending Inventory? 24,585.65
4. Compute the total loss due to fire. 14, 585.65

Net Purchases solution:

Accounts Payable
5,000

30,000 28,000 (Net Purchases)

3,000

Computation for Cost Ratio:

100%
𝐶𝑜𝑠𝑡 𝑅𝑎𝑡𝑖𝑜 𝑓𝑟𝑜𝑚 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑 =
(100% + 20%)
100%
𝐶𝑜𝑠𝑡 𝑅𝑎𝑡𝑖𝑜 𝑓𝑟𝑜𝑚 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑 =
(120%)
𝑪𝒐𝒔𝒕 𝑹𝒂𝒕𝒊𝒐 𝒇𝒓𝒐𝒎 𝒄𝒐𝒔𝒕 𝒐𝒇 𝒈𝒐𝒐𝒅𝒔 𝒔𝒐𝒍𝒅 = 𝟖𝟑. 𝟑𝟑%

Cost of Goods Sold Solution:

Gross Sales 75,000
Sales Return (5,500)
Net Sales 60,500
Multiply by: Cost Ratio (100% - 20%) 83.33%
Cost of Goods Sold 57,914.35
Ending Inventory Solution:

Inventory
50,000
28,000
4,500 57, 914.35
24,585.65 (Ending Balance)

Loss is computed as follows:

Ending Balance of Inventory 24,585.65
Goods in Transit (4,000)
Goods out of Consignment (5,000)
Salvage Value (1,000)
Inventory Loss due to the fire 14, 585.65

Retail Inventory Method

Problem 1
Kim Company used the retail method to estimate inventory at year end.
Cost Retail

Beginning inventory 720,000 1,000,000

Purchases 4,080,000 6,300,000

Net Markup 700,000

Net Markdown 500,000

Sales 6,820,000

Estimated normal shoplifiting losses 80,000

What amount should be reported as inventory at year-end?

a. 408,000
b. 600,000
c. 360,000
d. 384,000

Answer: D. 384,000
COMPUTATION Cost Retail
Beginning inventory 720,000 1,000,000
Purchases 4,080,000 6,300,000
Net Markup 700,000
Net Markdown (500,000)
Available for sale - average 4,800,000 7,500,000
Sales (6,820,000)
Estimated normal shoplifting losses (80,000)
Ending inventory at retail 600,000
Cost ratio 64%
Ending inventory at cost 384,000
4,800,000
Cost ratio
7,500,000
64%

Problem 2
Jin Company used the average cost retail method to estimate inventory at year end.
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 for the current year?
a. 4,800,000
b. 4,875,000
c. 5,200,000
d. 5,250,000

Answer: C, 5200,000
COMPUTATION Cost Retail
Beginning inventory 6,000,000 9,200,000
Net Markup 400,000
Net Markdown (600,000)
Available for sale - average 6,000,000 9,000,000
Sales (7,800,000)
Ending inventory at retail 1,200,000
Cost ratio 66.6%
Ending inventory at cost 800,000

6,000,000
Cost ratio
9,000,000
66.6%

TGAS @ cost 6,000,000

Ending inventory (800,000)
COGS 5,200,000

Additional Exercises:
Exercise 1:
Light company is a wholesaler of scented candles. The activity for item number 1234 during
June is presented below:
Date Transaction Units Cost
June 1 Beginning Balance 6,000 20.00
4 Purchases 9,000 24.00
12 Sales 10,800
19 Purchases 14,400 26.00
22 Sales 11,400
29 Purchases 4,800 27.00

a. Under the FIFO periodic inventory system, how much is the ending inventory of item #1234
at June 30?
b. Under the weighted average cost periodic inventory system, how much is the ending
inventory of item #1234 at June 30?

Answer:
a. Purchases
9,000 x 24 = 216,000
14,400 x 26 = 374,400
4,800 x 27 = 129,600 Beginning Balance 120,000
720,000 Purchases 720,000
Sales Total goods available for sale 840,000
6,000 x 20 = 120,000 Sales (523,200)
4,800 x 24 = 115,200 Ending Inventory 316,800
4,200 x 24 = 100,800
7,200 x 26 = 187,200
523,200

b. Total goods available for sale 840,000

Divide by: Total units available 6,000
9,000
14,400
4,800 34,200
Weighted Average Unit Cost 24.56
Multiply by: Units sold 22,200
Cost of Sales 545,232

Total goods available for sale 840,000

Cost of sales (545,232)
Ending Inventory 294,768

Exercise 2:
Focus Company recorded the following data pertaining to its raw materials during January 2021:
Date Received Cost Issued On Hand
Jan 1 - Inventory P8.00 3,200 units
Jan 11 - Issue 1,600 units 1,600 units
Jan 22 - Purchase 4,800 units P9.60 6,400 units

How much is the moving-average of the raw materials inventory at January 31, 2021?
Answer:
Units Unit Cost Total Cost
Beginning Inventory 3,200 8.00 25,600
Issued (1,600) 12,800
Balance 1,600 12,800
Purchased 4,800 9.60 46,080
Ending Inventory 6,400 58,880