BCVillaluz

ACCOUNTING LESSONS WITH BCSV

Accounting for Inventories

Problem 1: (Initial measurement of inventory)

Pluck Co. imported goods from France and incurred the following costs:

Invoice price P200,000

Trade discounts and other rebates 10,000
Import duties 20,000
Value added tax 26,000
Insurance on goods in transit 5,000
Delivery charges on goods originating from the supplier 8,000
Other handling costs 2,000
Commission to broker 4,000

1. How much is the cost of purchase of the imported goods if the entity is a VAT payor?
2. How much is the cost of purchase of the imported goods if the entity is not a VAT payor?

Problem 2:
Belgium Company has incurred the following costs during the current year:
1 Cost of purchases based on vendors’ invoices P5,000,000
2 Trade discounts on purchases already deducted from vendors’ invoices 500,000
3 Import duties 400,000
4 Freight and insurance on purchases 1,000,000
5 Other handling costs relating to imports 100,000
6 Salaries of employees in the accounting department 600,000
7 Brokerage commission paid to agents for arranging imports 200,000
8 Sales commission paid to sales agents 300,000
9 After-sales warranty costs 250,000

What is the total cost of purchases?

A. 5,700,000 C. 6,500,000
B. 6,100,000 D. 6,700,000

Problem 3:
Netherlands Company provided the following data at year-end:
1 Items counted in the bodega (including P50,000 damaged and unsalable goods) P4,050,000
2 Special order items included in the count specifically segregated per sale contract 100,000
3 Goods held on consignment at sales price, included in count (cost P125,000) 250,000
4 Items in the receiving department, returned by customer in good condition 50,000
5 Items ordered and in the receiving department 400,000
6 Items ordered, invoice received but goods not received. Freight is on account of seller 300,000
7 Items ordered, invoice received but goods not received. Freight is on account of buyer 240,000
8 Items shipped today, invoice mailed, FOB shipping point 250,000
9 Items shipped today, invoice mailed, FOB destination 150,000
10 Goods out on consignment at sales price, cost P150,000 200,000
11 Items currently being used for window display 200,000
12 Items on counter for sale 800,000
13 Items in receiving department, refused because of damage 180,000
14 Items in the shipping department 250,000
15 Items in the hands of salesmen 75,000
16 Goods held by customers on trial 80,000
17 Goods sold under installment basis, goods are in the hands of the customers 220,000
18 Goods purchased under installment basis, included in count 260,000
Compute for the correct amount of inventory.

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Problem 4:
Netherlands Company conducted a physical count on December 31, 2020 which revealed inventory with a cost of P4,410,000.

The following items were not included in the physical count:

Merchandise held by Netherlands on consignment P610,000
Merchandise shipped by Netherlands FOB destination to a customer on
December 31, 2020 and was received by the customer on January 5, 2021 380,000
Merchandise shipped by Netherlands FOB shipping point to a customer on
December 31, 2020 and was received by the customer on January 5, 2021 460,000
Merchandise shipped by a vendor FOB destination on December 31, 2020
was received by Netherlands on January 5, 2021 830,000
Merchandise purchased FOB shipping point was shipped by the supplier on
December 31, 2020 and received by Netherlands on January 5, 2021 510,000

What is the correct amount of inventory on December 31, 2020?

A. 3,800,000 C. 4,920,000
B. 4,690,000 D. 5,300,000

Problem 5:
Catherine Company included the following items in inventory:
Materials P1,400,000
Advance for materials ordered 200,000
Goods in process 650,000
Unexpired insurance on inventory 60,000
Advertising catalogs and shipping cartons 150,000
Finished goods in factory 2,000,000
Finished goods in company-owned retail store, including
50% profit on cost 750,000 / 150% = 500,000
Finished goods in hands of consignees including
40% profit on sales 400,000 x 60% = 240k
Finished goods in transit to customers, shipped
FOB destination at cost 250,000
Finished goods out on approval, at cost 100,000
Unsalable finished goods, at cost 50,000
Office supplies 40,000
Materials in transit, shipped FOB shipping point,
including freight of P30,000 360,000
Goods held on consignment, at sales price (cost, P150,000) 200,000

What is the correct amount of inventory as per IAS 2 Inventories?

A. 5,250,000 C. 5,500,000
B. 5,375,000 D. 5,540,000

Problem 6: (Periodic vs. Perpetual) [WITH ANSWERS]

The following transactions occurred during the year:
• Purchased goods worth P10,000 on account under credit terms of 20%, 10%, 2/10. n/30.
• Paid shipping costs of P1,000 on the purchases above.
• Returned damaged goods worth P2,000 to the supplier.
• Sold goods costing P5,000 for P20,000 on account.
• A customer returned goods with sale price of P800 and cost of P200.

Required: Prepare the journal entries to record the foregoing under the:
(a) Periodic inventory system
(b) Perpetual inventory system

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PERIODIC PERPETUAL
Purch 10,000.00 Invty. 10,000.00
AP 10,000.00 AP 10,000.00

F. In 1,000.00 Invty. 1,000.00

Cash 1,000.00 Cash 1,000.00

AP 2,000.00 AP 2,000.00
PRA 2,000.00 Invty. 2,000.00

AR 20,000.00 AR 20,000.00
Sales 20,000.00 S 20,000.00

CGS 5,000.00
MI 5,000.00

SRA 800.00 SRA 800.00

AR 800.00 AR 800.00

MI 200.00
CGS 200.00

Problem 7: (Accounting for Discounts; Periodic vs. Perpetual) [WITH ANSWERS]

An entity purchased inventory with a list price of P10,000 on account under credit terms of 20%, 10%, 2/10, 1/15, n/45.

1. Prepare the journal entries to record the foregoing using the gross method under periodic inventory system
assuming:
(a) The account was settled on Day 10.
(b) The account was settled on Day 15.
(c) The account was settled on Day 45.
2. Prepare the journal entries to record the foregoing using the gross method under perpetual inventory system
assuming:
(a) The account was settled on Day 10.
(b) The account was settled on Day 15.
(c) The account was settled on Day 45.
3. Prepare the journal entries to record the foregoing using the net method under periodic inventory system
assuming:
(a) The account was settled on Day 10.
(b) The account was settled on Day 15.
(c) The account was settled on Day 45.
4. Prepare the journal entries to record the foregoing using the net method under perpetual inventory system
assuming:
(a) The account was settled on Day 10.
(b) The account was settled on Day 15.
(c) The account was settled on Day 45.

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GROSS METHOD
PERIODIC PERPETUAL
Upon Purch. P 7,200.00 Invty. 7,200.00
AP 7,200.00 AP 7,200.00

Case A AP 7,200.00 AP 7,200.00

PD (7,200 x 2%) 144.00 Invty. 144.00
Cash (7,200 x 98%) 7,056.00 Cash 7,056.00

Case B AP 7,200.00 AP 7,200.00

PD (7,200 x 1%) 72.00 Invty. 72.00
Cash (7,200 x 99%) 7,128.00 Cash 7,128.00

Case C AP 7,200.00 AP 7,200.00

Cash 7,200.00 Cash 7,200.00

NET METHOD
PERIODIC PERPETUAL
Upon Purch. P (7,200 x 98%) 7,056.00 Invty. 7,056.00
AP 7,056.00 AP 7,056.00

Case A AP 7,056.00 AP 7,056.00

Cash 7,056.00 Cash 7,056.00

Case B AP 7,056.00 AP 7,056.00

PDL (7,200 x 1%) 72.00 PDL 72.00
Cash 7,128.00 Cash 7,128.00

Case C AP 7,056.00 AP 7,056.00

PDL (7,200 x 2%) 144.00 PDL 144.00
Cash 7,200.00 Cash 7,200.00

Problem 8:
Marine Company regularly buys goods from a supplier and is allowed trade discounts of 20% and 10% from the list price. The company
made a purchase during the year and received an invoice with a list price of P600,000, a freight charge of P15,000 and payment terms
of 2/10, n/30.

What is the cost of the purchase?

A. 432,000 C. 438,360
B. 435,000 D. 447,000

Problem 9:
On April 1, 2020, Jiro Company recorded purchases of inventory of P800,000 and P1,000,000 under credit terms of 2/15, net 30.

The payment due on the P800,000 purchase was remitted on April 16. The payment due on the P1,000,000 purchase was remitted on
May 1.

Under the net method and gross method, these purchases should be included at what respective amounts in the
determination of cost of goods available for sale?
Net method Gross method
A. 1,784,000 1,764,000
B. 1,764,000 1,800,000
C. 1,764,000 1,784,000
D. 1,800,000 1,764,000

Problem 10: (Cost Formulas; Inventory items are not interchangeable)

ABC Co. made the following transactions during the month of January 2020:

January 1 Purchased 1,000 units @ P2.00

January 12 Purchased 3,000 units @ P2.20
January 17 Sold 2,000 units
January 30 Purchased 1,000 units @ P2.40

The 3,000 units in the inventory on January 30 is composed of 500 units from purchases made on January 1, 1,500 units from purchases
made on January 12 and 1,000 units from purchases made on January 30.

Required: Calculate the (a) cost of ending inventory and the (b) cost of goods sold using specific identification method of inventory
valuation.

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Problem 11: (Comprehensive: Cost Formulas; Inventory items are interchangeable)
The following information has been extracted from the records about one product:

Date Transaction Units Unit cost Total cost

8/1 Beginning inventory 2,000 36.00 P72,000
8/7 Purchase 3,000 37.20 111,600
8/12 Sales 4,200
8/13 Sales return 600
8/21 Purchase 4,800 38.00 182,400
8/22 Sales 3,800
8/29 Purchase 1,900 38.60 73,340
8/30 Purchase return 300 38.60 11,580

Required: Compute for the (a) ending inventory and (b) cost of sales under the following cost formulas:
1. FIFO – periodic
2. FIFO – perpetual
3. Weighted average
4. Moving average

Problem 12: (LCNRV)

Thessa Company provided the following inventory data at year-end:
Cost NRV
Product A 2,200,000 2,500,000
Product B 1,700,000 1,500,000
Product C 700,000 800,000
Product D 400,000 500,000

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

A. 4,800,000 C. 5,200,000
B. 5,000,000 D. 5,300,000

Problem 13:
At year-end, Carlisle Company reported ending inventory at P3,000,000, and the allowance for inventory writedown before any
adjustment at P150,000.

Product Product Product Product

A B C D
Historical cost 800,000 1,000,000 700,000 500,000
Replacement cost 900,000 1,200,000 1,000,000 600,000
Estimated sales price 1,200,000 1,300,000 1,250,000 1,000,000
Estimated cost of disposal 650,000 200,000 300,000 650,000
Normal profit 250,000 150,000 300,000 300,000
550k 1100k 950k 350k
1. What amount of loss on inventory writedown should be included in cost of goods sold?
A. 100,000 C. 250,000
B. 200,000 D. 400,000

2. Assuming the allowance for inventory writedown before any adjustment is P500,000, what amount of gain on
reversal of writedown should be recognized?
A. 0 C. 250,000
B. 100,000 D. 400,000

Problem 14:
Information on ABC Co.’s inventories is as follows:

Cost Replacement cost/NRV

Raw materials 60,000 50,000
Finished goods 100,000 120,000

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

A. 150,000 C. 170,000
B. 160,000 D. 180,000

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2. Assuming the NRV of the finished goods is P90,000, what amount should be reported as inventory at year-end?
A. 140,000 C. 160,000
B. 150,000 D. 170,000

Problem 15: (Purchase Commitment)

On November 25, 2019, Lester Richie Company entered into a commitment to purchase 10,000 units of product X on February 15, 2020
at a price of P310 per unit.

On December 31, 2019, the market price of product X is P270 per unit. On February 15, 2020, the market price of product X is P300 per
unit.

CASE 1: The purchase commitment is noncancelable.

1. What is the loss on purchase commitment to be recognized on December 31, 2019?
A. 0 C. 300,000
B. 100,000 D. 400,000

2. What is the gain on purchase commitment to be recognized on February 15, 2020?

A. 0 C. 300,000
B. 100,000 D. 400,000

3. What amount should be debited to purchases on February 15, 2020?

A. 2,700,000 C. 3,100,000
B. 3,000,000 D. 3,500,000

4. What amount should be recognized as accounts payable on February 15, 2020?

A. 2,700,000 C. 3,100,000
B. 3,000,000 D. 3,500,000

CASE 2: The purchase commitment is cancelable.

1. What is the loss on purchase commitment to be recognized on December 31, 2019?
A. 0 C. 300,000
B. 100,000 D. 400,000

2. What is the gain on purchase commitment to be recognized on February 15, 2020?

A. 0 C. 300,000
B. 100,000 D. 400,000

3. What amount should be debited to purchases on February 15, 2020?

A. 2,700,000 C. 3,100,000
B. 3,000,000 D. 3,500,000

4. What amount should be recognized as accounts payable on February 15, 2020?

A. 2,700,000 C. 3,100,000
B. 3,000,000 D. 3,500,000

Problem 16:
On November 25, 2019, Lester Richie Company entered into a non-cancellable commitment to purchase 10,000 units of product X on
February 15, 2020 at a price of P310 per unit.

On December 31, 2019, the market price of product X is P270 per unit. On February 15, 2020, the market price of product X is P320 per
unit.

1. What is the loss on purchase commitment to be recognized on December 31, 2019?

A. 0 C. 300,000
B. 100,000 D. 400,000

2. What is the gain on purchase commitment to be recognized on February 15, 2020?

A. 0 C. 400,000
B. 100,000 D. 500,000

3. What amount should be debited to purchases on February 15, 2020?

A. 2,700,000 C. 3,100,000
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B. 3,000,000 D. 3,200,000

4. What amount should be recognized as accounts payable on February 15, 2020?

A. 2,700,000 C. 3,100,000
B. 3,000,000 D. 3,500,000

5. Assuming the market price of product X on December 31, 2019 is P330 per unit, how much shall be recognized
as gain on purchase commitment on December 31, 2019?
A. 0 C. 400,000
B. 100,000 D. 500,000

Problem 17: (Gross profit method)

Great Comrade Company reported the following information for the current year:

Beginning inventory P5,000,000

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 of P4,000,000. At year-end, unsold goods out on consignment
with selling price of P1,000,000 are in the hands of a consignee. The gross profit was 40% of sales. What is the estimated cost of
inventory shortage?
A. 1,200,000 C. 2,100,000
B. 1,800,000 D. 2,700,000

Problem 18:
On the night of September 30, 2020, a fire destroyed most of the merchandise inventory of AA Company.

All goods were completely destroyed except for partially damaged goods that normally sell for P100,000 and that had an estimated net
realizable value of P25,000 and undamaged goods that normally sell for P60,000.

Inventory, January 1 P 660,000

Net purchases, January through September 30 4,240,000
Net sales, January 1 through September 30 5,600,000

Total 2019 2018 2017

Net sales 9,000,000 5,000,000 3,000,000 1,000,000
Cost of sales 6,750,000 3,840,000 2,200,000 710,000
Gross profit 2,250,000 1,160,000 800,000 290,000

What is the estimated amount of fire loss on September 30, 2020?

A. 580,000 C. 630,000
B. 615,000 D. 700,000

Problem 19: (Retail Inventory Method)

The following information has been provided by Denver Corporation for the year 2020:

Cost Retail
Inventory, January 1 P179,600 P200,000
Purchases 475,400 800,000
Purchase returns 50,000 80,000
Purchase discounts 23,000
Purchase allowance 10,000
Freight-in 5,000
Markups 200,000
Markup cancellations 40,000
Departmental transfer-in 70,000 100,000
Departmental transfer-out 60,000 90,000
Abnormal loss 20,000 40,000
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Markdown 115,000
Markdown cancellations 10,000

Sales 775,000
Sales returns 80,000
Sales allowances 50,000
Sales discounts 70,000
Employee discounts 25,000
Normal loss 100,000
The company reported inventories per physical count conducted at the close of business on December 31 at P40,000.

Compute for the cost of inventory shortage under:

1. Average approach
2. First-in, first-out approach
3. Conservative approach

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