Inventories

CHAPTER 7
INVENTORIES

PROBLEM 1: TRUE OR FALSE

1. According to PAS 2 Inventories, inventories are measured at net realizable value.

FALSE
2. An increase in inventory always has a corresponding increase in accounts payable
FALSE
3. Entity Y acquires merchandise from Entity Z in an arrangement whereby Entity Z is
obligated to repurchased the merchandise at a future date. Entity Y shall include the
merchandise acquired from Entity Z in its inventory.
FALSE
4. If the beginning balance of inventory is ₱50 while net purchases totaled ₱100 and
cost of goods sold was ₱30, the ending inventory must be ₱120.
TRUE
Used the following information for the next five questions:
Fact pattern
Big Co. sells apples. At the start of the period, Big Co.’s inventory consisted of ine (1) red
apple with a carrying amount of ₱2 During the period, Big Co. acquired one (1) green apple
for ₱3 and one(1) blue apple for ₱4. Big Co. sold the green apple during the period.

5. Under the FIFO cost formula , Big Co.’s ending inventory is ₱6.
FALSE (₱3+₱4=₱7)
6. Under the FIFO cost formula, Big Co.’s cost of goods sold for the period is ₱3.
FALSE (₱2- the cost of the red apple)
7. UNder the Average cost formula, Big Co.'s ending inventory is ₱3.
FALSE (2+3+4)/3 apples x 2 apples on hand = 6
8. Under the Average cost formula, Big Co.’s sold ₱3
TRUE
9. Under the Specific identification cost formula, Big Co.’s cost of goods sold is ₱3
TRUE
10. Entity A’s inventory had a cost of ₱10 and an NVR of ₱8 on December 31, 20x1.
Accordingly, Entity A recognized an inventory write-down of ₱2. On December 31,
20x2, the cost of inventory is ₱15, while the NRV is ₱18. Entity A should recognize a
₱3 reversal of inventory write-down in 20x2.
FALSE (₱2- the amount if write-down in prior period)

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PROBLEM 2: FOR CLASSROOM DISCUSSION

Definition
1. Inventories are sale in the ( choose the incorrect one)
a. Held for sale in the ordinary course of business.
b. In the process of production for sale.
c. In the form of materials or supplies to be consumed in the production process
or in the rendering of services.
d. Held for use in the product or supply of goods or services

Recognition
2. Which of the following is incorrect regarding the accounting for inventories?
a. Legal title over inventories normally passes when possession over the goods
is transferred.
b. Transfer of ownership over inventories may precede, coincide with, or follow
the transfer of physical possession of the goods.
c. C Ownership over inventories may be transferred to buyer even when legal
little to the goods is retained by the seller
d. Transfer of ownership over inventories may coincide with or follow but can
never precede the transfer of physical possession of the goods.

Goods in Transit
3. Who owns the goods in transit under FOB shipping point?
a. Buyer
b. Seller
c. Either a or b
d. none
Explanation: The buyer is the one who would file a claim for damages if needed

4. Under this shipping cost agreement, freight is not yet paid upon shipment. The
carrier collects the shipping cost from the buyer upon delivery.
a. Freight collect
b. Freight prepaid
c. FOB shipping point
d. FOB destination

5. Who should properly shoulder the freight cost of the goods shipped?
a. The entity who owns the goods
b. The buyer
c. The seller
d. The shipper

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6. On December 28, 20x1, Entity A purchases goods worth ₱100,000 on account.

Freight cost amount to ₱6,000. The seller ships the goods on December 30, 20x1
Entity A receives the shipment on January 2, 20x2 and settles the account on January
5, 20x2.

Requirement: Compute for the cost of inventory on December 31, 20x1 and the net cash
payment to the supplier on January 5, 20x2 under each of the following scenarios:
Scenarios: Cost of inventory on Dec.31 Net cash payment on Jan.5

a. FOB Destination, Freight None 100,000

prepaid

b. FOB Shipping point, 106, 000 100,000

Freight collect

c. FOB Destination, Freight None 94,000

collect

d. FOB Shipping point, 106,000 106,000

Freight prepaid

Consigned goods
7. Which statement is true?
a. Until goods are sold by the consignee, the consignor includes the goods in
his/her inventory at cost, less handling and shipping costs incurred in
delivering the goods to the consignee.
b. When goods are sold on an installment plan, the seller retains title and
continues to include them in his/her balance sheet until full payment has
been received.
c. Title to goods cannot be transferred to the buyer before shipment occurs.
d. In accounting for inventory, economic substance should take precedence over
legal form.

8. Which of the following is incorrect regarding the accounting for consigned goods?
a. Consigned goods are properly included in the inventory of the consignor and
not the consignee
b. Freight incurred by the consignor in delivering the consigned goods to the
consignee forms part of inventories.
c. The consignee records consigned goods received from the consignor through
journal entries
d. The consignor should not recognize revenue until the consignee sells the
goods to third parties.

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Inventory financing agreements

9. All of the following may properly be included in inventory, except
a. Goods sold by an entity under a sale with repurchase agreement
b. Goods pledge by an entity as security for a loan obtained.
c. Goods borrowed by an entity to be replaced with similar goods in the future
d. Goods transferred by an entity to another entity to be replaced with similar
goods in the future.

10. ABD Co. is having its inventory cut-off on December 31, 20x1. The following
information is gathered for this purpose:
a. The inventory count sheet shows total inventory of P500,000 while the ledger
shows a balance of $120,000 in accounts payable.
b. Not included in the physical count is a shipment of inventory to a customer
on December 30, 20x1 amounting to P60,000. The sale is FOB destination.
The customer received the shipment on January 3, 20x2.
c. Included in the physical count and accounts payable is inventory costing
P80,000 purchased from a supplier under FOB Destination. Th is is
indicated in the count sheet as "in-transit."
d. Not included in the count and in the records is a purchase of inventory
costing P50,000 from a supplier on December 31, 20x1. The shipping term is
FOB Shipping point. The supplier shipped the goods on December 31, 20x1.
ABC Co. received the shipment on January 2, 20x2.
e. Not included in the count is inventory costing P30,000. Investigation shows
that the inventory is ordered by a customer on December 31, 20x1. The sale
term is FOB Shipping Point. The inventory is shipped and the customer is
billed on January 2, 20x2

Requirement: Compute the adjusted balances of inventory and accounts payable on

December 31, 20x1.
Solution:

Inventory Accounts payable

Unadjusted balances 500,000 120,000

(b) 60,000 -
(c ) (80,000) (80,000)
(d) 50,000 50,000
(e) 30,000 -

Adjusted balances 560,000 90,000

11. ABC Co. is having its inventory cut-off on December 31, 20x1. The following
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information is gathered for this purpose:

a. The inventory count sheet shows a total inventory of 180,000.
b. The count includes inventory amounting to P30,000 received from XYZ, Inc.
under a consignment arrangement.
c. The freight cost of the inventory referred to in (b) above is 1,000. ABC Co.
paid for this cost and recorded it as a debit to a receivable account.
d. The inventory count does not include inventory costing P18,000 sent out to
DEF Co. under a consignment arrangement. Only half of this inventory was
sold to third parties as of December 31, 20x1.
e. The freight cost of delivering the inventory referred to in (d) above to DEF Co.
is P2,000. ABC Co. recorded this cost as expense.

Requirement: Compute the correct balance of inventory as of December 31, 20x1.

Solution:
180,000-30,000+ [(18,000+2,000)x½] = 160,000

12. The record of ABC Co. show the following:

a. Inventory on display shelves, per physical count 100,000
b. Inventory stocked in warehouse, per physical count 250,00
c. Inventory sold under a bill and hold arrangement, included in the stock of
inventory in warehouse 20,000
d. Inventory purchased in an installment sale, physical possession is obtained
but the seller retains legal title to the goods until full payment of the
purchase price, not included in the physical count 30,000
e. Inventory pledged as collateral security for a bank loan, not included in the
count 60,000
f. Inventory purchased under a law away sale. plan, physical possession is not
yet obtained until full payment of the purchase price 80,000
g. Inventory sold wherein ABC Co. is obligated to repurchase the inventory at a
future date, not included in the physical count 10,000

Requirement: Compute for the balance of inventory

Solution
a. Inventory on display shelves 100,000
b. Inventory flicked in warehouse 250,000
c. Inventory sold under a bill and hold
Arrangement, included in the stock of inventory in warehouse (20,000)
d. Inventory purchased in installment sale, physically
possession in obtained but the seller retained legal title 30,000
To the goods until full payment of purchase price 0
e. Inventory pledged as collateral security for a bank 60,000

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f. Loan 0
g.Inventory sold wherein ABC Co. is obligated to 10,000
Repurchase the inventory at a future date 0

430,000

Financial statement system

13. Inventories are classified on the statement of financial position as
a. Current assets.
b. Noncurrent assets.
c. Financial instruments
d. Intangible assets.
Explanation: inventory is classified as a current asset on a company's balance sheet, and it
serves as a buffer between manufacturing and order fulfillment.

Inventory system
14. Spongebob Squarepants Co. utilizes an automated accounting system in which
Spongebob inputs the serial number of each item of inventory in the system. This
enables Spongebob to track the movement of each inventory. Which inventory
system is Spongebob most likely to be using?
a. Perpetual system
b. Periodic system
c. Patty system
d. Spatula system
e. a or b

15. The “inventory account is updated for each purchase and sale of inventory under this
type of accounting system.
a. Respiratory system
b. Automatic system
c. Perpetual system
d. Periodic system

16. Cost of goods sold is a residual amount under this system

a. Skeletal system
b. Endocrine system
c. Perpetual system
d. Periodic system

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17. Entity A’s beginning was P20,000. The following transactions occurred during the
period:
a. Purchases of inventory on account - P450,000
b. Freight costs paid on purchases - P25,000
c. Damaged goods returned to suppliers - P10,000
d. Sales on account - P80,000; cost of sales - P380,000
e. Sales returns - P9.000 sale price: P4,275 cost

Requirements:
a. Prepare the journal entries under (a) perpetual inventory system and (b) periodic
inventory system.
b. Compute for the gross profit earned during the period assuming the physical count of
ending inventory shows a balance of P109,274.
Solution:
Requirement (a)

Perpetual system Periodic system

(a)

Inventory 450,000 Purchases 450,000

Accounts payable 450,000 Accounts payable 450,000

(b)

Inventory 25,000 Freight-in 25,000

Cash 25,000 Cash 25,000

(c)

Accounts payable 10,000 Accounts payable 10,000

Inventory 10,000 Purchase returns 10,000

(d)

Accounts receivable 800,000 Accounts receivable 800,000

Sales 800,000 Sales 800,000

Cost of goods sold 380,000 No entry

Inventory 380,000

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(e)

Sales in return 9,000 Sales returns 9,000

Accounts receivable 9,000 Accounts receivable 9,000

Inventory 4,275 No entry

Cost of goods sold 4,275

Requirement (b):
Perpetual system
Sales 800,000
Sales returns (9,000)
Net sales 791,000
Cost of sales (375,725)
Gross profit 415,275

Perpetual system
Sales 800,000
Sales returns (9,000)
Net sales 791,000
Cost of sales
Beginning inventory
Net purchases 465,000
Total goods avail for sale 485,000
Ending inventory (109,275) (375,725)
Gross profit 415,275

Inventory errors under periodic system

18. If ending inventory is understated, (choose the incorrect statement)
a. Cost of goods sold is overstated
b. Profit for the year is understated
c. Net purchases is unaffected
d. Profit of the year is overstated

measurement
19. At each reporting date, inventories are measured at
a. Cost
b. The lower of cost and NRV
c. Cost plus direct acquisition cost
d. Fair value less cost to sell

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20. The cost of inventories includes

I. cost of purchase
II. cost of conversion
III. other costs necessary in bringing the inventory to its intended condition and
location
a. I only
b. II only
c. I and II
d. I,II and III

21. The purchase cost of inventories includes all of the following except
a. Purchase price
b. Import duties and non-refundable taxes
c. Freight cost incurred in bringing the inventory to its intended location
d. Value added taxes paid by a VAT registered payer

22. Which of the following costs is included as part of the cost of inventories?
a. Abnormal amount of wasted materials, labor or other production cost
b. Storage costs
c. Administrative overheads
d. Selling costs
e. None of the choices

23. Entity acquires inventories and incurs the following costs:

Purchase price, gross of trade discount 100,000
Trade discount 20,000
Non- refundable purchase tax, not included
In the purchase price above 5,000
Freight-in (transportation costs) 15,000
Commission to broker 2,000
Advertisement costs 10,000

Requirement: how much is the cost of inventories purchased?

Solution:
Purchase price, gross of trade discount 100,000
Trade discount (20,000)
Non-refundable purchase tax 5,000
Freight-in (transportation costs) 15,000
Commission to broker 2,000
Total cost of inventories 102,000

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Gross method vs. net method

24. On january 1, 20x1, entity A purchases inventory with a list price of P200,000 on
account under credit terms of 20%, 10%, 5/10, n/25. Entity A pays settles half of the
invoice price on january 10, 20x1 and the remaining half on january 31, 20x1.

Requirement: Prepare the journal entries under (a) gross method and (b) net method. Use
the periodic inventory system.
Solution:

Gross method Net method

Jan.1, 20x1

Purchases 144,000* Purchases 136,800*

Accounts payable 144,000 Accounts payable 136,800

*(P200,000 x 80% x 90%) *(P200,000 x 80% x 90% x 95%)

Jan. 10, 20x1

Accounts payable* 72,000 Accounts payable 68,400

Purchase discounts 3,600 Cash 68,400
(144,000 x ½ x 5%)
Cash ** 68,400

*(144k x ½) * (136.8K x ½ )
**(144k x ½ x 95%)

Jan. 31, 20x1

Accounts payable* 72,000 Accounts payable 68,400

Cash 72,000 Purchase discount lost 3,600
Cash 72,000
*( 144K x ½)

Cost formulas
25. Generally accepted accounting principles require the selection of an inventory cost
flow method which
a. Emphasized the valuation of inventory for balance sheet purposes.
b. Most closely approximates lower of cost and net realizable value for the
ending inventory
c. Most clearly reflects the periodic income.

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d. Matches the physical flow of goods from inventory with sales revenue
e. Yields the cost conservative amount of reported income

26. The specific identification methods can be used only

a. In income tax returns
b. For financial reporting purposes ( but not income tax returns).
c. When The individual items in inventory are similar in terms of cost, function,
and sales revenue
d. When the actual acquisition costs of individual units can be determined from
the accounting records

27. The following information was available from the inventory records of the brooks
company for january 2002:
Units unit cost total cost
Balance at january 1, 2002 3,000 P19.55 P58,650
Purchases:
January 6, 2002 10,200 21.50 219,300
January 26, 2002 2,250 20.60 46,350
Sales:
January 7, 2002 2,700
January 31, 2002 7,200

Requirements: Compute for the (1) ending inventory and (2) cost of goods sold under each
of the following cost flow formulas:
a. FIFO periodic
b. FIFIO perpetual
c. Weighted average cost periodic
d. Weighted average cost perpetual (Moving average)
Solution:
Requirements (a): FIFO Periodic
Ending inventory, in units= (3,000+2,250+10,200-2,700-7,200)= 5,550

Units Unit cost Total cost

Ending inventory in units 5,550

Allocation to latest
Purchases:
Jan. 26 2,250 20.60 46,350
Jan. 6 (balance) 3,300 21.50 70,950
Ending inventory in pesos 117,300

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TGAS (58,650+219,300+46,350) 324,300

Less: Ending inventory in pesos (117,300)
COGS 207,000

Requirement (b): FIFO Perpetual

Units Unit Cost Total Cost

Balance at january 1,
2002 3,000 19.55 58,650
January 6, 2002 10,200 21.5 219,300
January 7, 2002 (2,700) 19.55 (52,785)
January 26, 2002 2,500 20.6 46,350
January 31, 2002 (7,200) * (154,215)
Ending inventory 5,550 117,300

*the COGS on the jan.31 sale is computed as follows:

Units Unit Cost Total Cost
Jan 31. Sale 7,200
Allocation:
From Jan 1, (3,000-
2,700) 300 19.55 5,865
From Jan. 6 (balance) 6,900 22 148,350
COGS-Jan 31. Sale 154,215

COGS= (52,785+154,215) amounts taken from table above =207,000

Requirements (c) Weighted Average Cost Periodic

Weighted ave. unit cost = TGAS∈ pesos
TGAS in units
Weighted ave. unit cost = (58,650+219,300+ 46,350)=324,300
(3,000 + 10,200 + 2,250) = 15,450
Weighted ave. unit cost = 20.99

Ending inventory in units 5,550

Multiply by: Wtd. Ave. Cost 20.99
Ending inventory in pesos 116,495

TGAS in pesos 324,300

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Less: ending inventory in pesos (116,495)

COGS 207,805

Requirement (d): Weighted Average Cost Perpetual

Units Unit Cost Total Cost
Balance at january 1, 2002 3,000 19.55 58,650
January 6, 2002 10,200 21.5 219,300
TGAS 13,200 21.06 277,950
January 7, 2002 (2,700) 21.06 (56,862)
January 26, 2002 2,250 20.6 46,350
TGAS 12,750 20.98 267,438
January 31, 2002 (7,200) 20.98 (151,058)
Ending inventory 5,550 116,382

COGS =(56,862+151,056) = 207,918

Write-down of inventory
28. Which of the following is/are true under PAS 2?
I. Inventories can only be “written down”but not “written up.”
II. Inventories may be “written up” above their cost if it is clear that their values have
increased subsequent to previous write-down.
III. Storage costs are included in the cost of inventory only when they are necessary in
bringing the inventory to its intended condition and location.
a. II only
b. I, II and III
c. III only
d. I and III

29. Information on ABC Co.’s December 31, 20x1 inventory is shown below:
Product A Product B Product C

Purchase price 100,000 250,000 300,000

Freight-in 12,000 30,000 36,000

Selling price 210,000 300,000 570,000

Freight-out 10,500 75,000 11,400

General overhead costs 6,300 9,000 17,100

Requirements:

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a. Compute for the inventory to be presented in ABC’s December 31, 20x1 statement of
financial position.
b. Compute for the amount of write-down to be recognized in 20x1 profit or loss.

Solution:
Requirement (a):

Product A Product B Product C Total

Purchases 100,000 250,000 300,000

price 12,000 30,000 36,000
Freight in

Cost 112,000 280,000 336,000

Selling price 210,000 300,000 570,000

Freight out (10,500) (75,000) (11,400)

NRV 199,500 225,000 558,600

Lower 112,000 225,000 336,000 673,000

Requirement (b):
Product B: (280,000-225,000)= 55,000

Reversals of inventory write-down

30. Information on ABC Co.’s inventories is shown below:
20x1 20x2

Cost 600,000 900,000

NRV 400,000 650,000

Requirement: Compute for the gain on reversal of write-down to be recognized in 20x2 profit
or loss.

Solution: 200,000 - the amount of write down in 20x1 because the 20x2 recovery exceeds
the cumulative amount of write downs recognized in the previous periods.

PROBLEM 3: EXERCISES
1. The inventory records of Sunset Co. on December 31, 20x1 shows a balance of
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P260,000. The following information was gathered:

a. Goods costing P100,000, purchased FOB shipping point, were not included in
the ledger balance because these were still in transit as of December 31,
20x1. The supplier shipped the goods on December 31, 20x1 and prepaid the
freight of P1,000.
b. Goods costing P5,000 were received on December 31,20x1. These were
recorded on January 3, 20x2.
c. Goods costing P16,000 were shipped to a customer on December 31, 20x1 on
an FOB shipping point term. The goods were included in the ledger balance
because the customer received the shipment only on January 4, 20x2.
d. Goods costing P20,000 were shipped to a customer on December 31, 20x1 on
an FOB destination term. The goods were not included in the ledger balance
because the goods were already dispatched when the inventories were
counted at around 11 P.M. on December 31, 20x1.
e. Obsolete goods costing P4,000 were included in the ledger balance. These
goods have no resale value.

Requirement: Compute for the correct inventory on December 31, 20x1.

Solution:

Unadjusted balance 260,000

(a) 11,000

(b) 5,000

(c) (16,000)

(d) 20,000

(e) (4,000)
Correct inventory 276,000

2. Egg Co. records purchase discounts lost and uses the perpetual inventory system. Egg
had the following transactions during the period:
a. Purchased goods on account for P140,000. The term is 2/10, n/30.
b. Paid ¾ of the amount due within the discount period.
c. Paid the remainder beyond the discount period.

Requirement: Prepare the journal entries.

Solution:
(a) Inventory (140,000x98%) 137,200
Accounts payable 137,200

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(b) Accounts payable 102,900

Cash 102,900
(c) Accounts payable (137.3k x25%) 34,300
Purchase discount lost 700
Cash (140,000x25%) 35,000

3. Alco Co. records purchases at net amounts and uses the periodic inventory system.
Alco had the following transactions during the month:

June 11 Purchased merchandise on account, P9,000, terms 2/10, n/30.

15 Returned part of June 11 purchase, P1,000, and received credit on account.

30 Prepared the adjusting entry required for financial statements.

Requirement: Prepare the journal entries.

Solution:
June 11 Purchases (.98 x P9,000) 8,820
Accounts payable 8,820
15 Accounts payable (.98 x P1,0000) 980
Purchase returns and allowances 980
30 Purchase discounts lost(.02 x P8,000) 160
Accounts payable 160

4. Neer Corp. purchased merchandise during 2004 on credit for P200,000; terms 2/10,
n/30. All of the gross liability except P40,000 was paid within the discount period.
The remainder was paid within the 30-day term. At the end of the end annual
accounting period, December 31, 2004, 90% of the merchandise had been sold and
10% remained in inventory. The company uses a periodic system.

Requirements:
(a) Assuming that the net method is used for recording purchases, prepare the entries
for the purchase and two subsequent payments.
(b) What peso amounts should be reported for the ending inventory and cost of goods
sold under the (1) net method; (2) gross method*? Assume that there was no
beginning inventory.

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*For the gross method, assume further the following:

a. The discount is allocated only to the goods sold; and
b. The discount is allocated to both the ending inventory and the goods sold.

Requirement (a):
Purchases 196,000
Accounts payable 196,000
(.98 x P200,000= P196,000.)

Payment within the discount period:

Accounts payable 156,800
Cash 156,800
(P200,000-P40,000=P160,000 x .98= P156,800.)

Payment within the discount period:

Accounts payable(40k x 98%) 39,200
Purchase discounts lost(40k x 2%) 800
Cash 40,000

Requirement (b):
(1) Net method:
Ending inventory (200,000x98%x10%) P19,600
Cost goods sold (200,000 x 98% x 90%) P176,400
(2) Gross method:
(A) Discounts is allocated only to the goods sold:

Gross amts. Allocation of Net amounts

discounts

El (200k x 10%) 20,000 - 20,000

COGS (200k x 90%) 180,000 3,200 176,800

Total 200,000 3,200

(B) Discount is prorated to both the goods sold and ending inventory:

Gross amts. Allocation of Net amounts

discounts

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El (200k x 10%) 20,000 320* 19,680

COGS (200k x 90%) 180,000 3,200* 177,120
Total 200,000 3,200
*(3,200 x 10%; 3,200 x 90%)

5. Changes in Entity A’s inventory for Product x for the month of June are shown below:
Date Transaction Quantity Unit Cost

June 1 Balance forwarded 1,400 P24

8 Sale 400

14 Purchase 800 P35

18 Sale 900

24 Purchase 700 P30

29 Sale 600
Requirements: Compute for the (a) ending inventory and (b) cost of goods sold under each
of the following cases:
a. FIFO periodic
b. FIFO perpetual
c. Weighted average periodic
d. Weighted average perpetual (Moving average)
Requirement (a): FIFO periodic
➢ Ending inventory, in units = 1,400-400+800-900+700-600
In units Unit cost In pesos

Ending inventory 1,000

Allocation to june 24

Purchase (700) 30 21,000

Excess allocated to
June 14 purchase 300 35 10,500
Ending inventory in pesos 31,500
➢ TGAS in pesos:

Date Transaction Quantity Unit cost In pesos

June 1 Balance fwd. 1,40
0 24 33,600

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1 Purchase 80
4 0 35 28,000
2 Purchase 70
4 0 30 21,000
TGAS, in pesos: 82.600

6. Compute for the missing amounts in the table below using T-accounts.

Inventory, beg. Net purchases Cost of sales Inventory, end.

a. 10,000 198,000 112,000 96,000

b. 36,000 145,000 125,000 56,000

c. 15,000 58,000 64,000 9,000

d. 25,200 112,000 89,200 48,000

PROBLEM 4: CLASSROOM ACTIVITIES

ACTIVITY #1: RECOGNITION OF INVENTORIES

You are the accountant of ABC Co., a VAT-registered company engaged in the business of
trading goods. During the period, you have received the documents shown below in
conjunction with the purchase of inventory on account.

Requirements:
a. The term of sale is FOB
b. The freight term is freight
c. Provide the entry to record the transaction above. ABC Co. uses the perpetual
inventory system.

Solutions:
(a) The term of sale is FOB SHIPPING POINT, indicator: the freight is chargeable to ABC Co.
(COD-CASH ON DELIVERY)

(b) The freight term is Freight COLLECT

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(C) Journal entry:

JOURNAL

Ref.
DATE ACCOUNTS Debit Credit

9/27/x1 inventory/ purchases 8,689.29

Input VAT 910.71

Accounts
payable 8,500.00

Cash 1,100.00

to record the purchase of

inventory

(a) The date of the Bill of lading - shipment date.

(b) Purchase price net of VAT P7,589.29 + freight (P900.00 bill of lading P200.00 porter fee) =
P8,689.29 cost of purchase

ACTIVITY #2: APPLYING THE COST FLOW FORMULAS

You are the accountant of ABC Co. a multi company engaged in selling fertilized duck eggs.
Your company had the following transactions during the period.

Requirements :
1. Compute for the following using the specific identification method:
a. Cost of goods sold P7.00−the cost of item broken
b. Ending inventory P11.75
2. Compute for the following using the FIFO method:
a. Cost of goods sold P5.75−the cost of item happy
b. Ending inventory P13.00
3. Compute for the following using the weighted average cost method:
a. Cost of goods sold ( P5.75+ P 6.00+ P 7.00)÷ 3=P6.25
b. Ending inventory (P5.75+ P 6.00+ P 7.00)−P 6.25=P 12.50

PROBLEM 5: MULTIPLE CHOICE - THEORY

1. Which of the following is correct regarding the recognition of inventories?

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 Inventories

a. Inventories are recognized only when legal title is obtained.

b. Inventories are recognized only when they meet the definition of inventory
and they qualify for recognition as assets.
c. Inventories include only those that are readily available for sale in the
ordinary course of business.
d. Inventories are recognized only when the buyer has taken physical possession
over the goods.

2. When accounting for inventories,

a. the form of the sales contract is more important than its substance.
b. the agreement between the seller and the buyer is considered in determining
the timing of transfer of ownership over the goods.
c. the sales contract is ignored because ownership over inventories is
transferred only upon receipt of delivery by the buyer.
d. a journal entry is made only upon receipt of the delivery by the purchaser.

3. Who owns the goods in transit under FOB destination?

a. buyer
b. seller
c. either a or b
d. none

4. Which of the following should be excluded from an entity’s inventories?

a. merchandise displayed in the sales department
b. goods contained in the warehouse
c. goods in-transit purchased under FOB destination
d. goods in-transit purchased under FOB shipping point

5. Which of the following is included in an entity’s inventories?

a. damaged and worthless merchandise
b. goods sold under a sale with repurchase obligation
c. goods in-transit sold under FOB shipping point
d. goods purchased under a “lay-away” sale, physical possession over the goods
is not yet obtained

6. Which of the following may be included in an entity’s inventories?

a. goods received under consignment sale
b. goods purchase under a “bill and hold” sale, billing is obtained and the goods
are already segregated but the delivery is deferred as per the entity’s request
c. goods sold where large returns are expected
d. all of these

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 Inventories

7. Which of the following is excluded from an entity’s inventories?

a. Consigned goods delivered to another entity
b. raw material borrowed from another entity to be replaced with similar raw
materials in the future
c. merchandise sold under FOB shipping point, located in the warehouse
awaiting shipment
d. inventories sold under installment sale whereby the entity retains legal title
solely to protect the collectability of the transaction price

8. Under this shipping cost arrangement, the seller pays in advance the freight before
shipment.
a. freight collect
b. freight prepaid
c. FOB shipping point
d. FOB destination

9. The cost of consigned goods includes

a. transportation costs incurred in delivering the consigned goods to the
consignee’s place of business.
b. repair costs for damages to the goods during shipment.
c. Advance commissions given to the consignee.
d. all of these

10. Which of the following is an objective of inventory accounting according to PAS 2

Inventories?
a. The proper recognition of cost of inventory that is charged as expense when
the related revenue is recognized.
b. The proper representation of cost of inventories recognized as assets in the
financial statements.
c. a and b
d. none of these

11. Under this inventory system, a physical count is necessary before profit is
determined.
a. Perpetual
b. Periodical
c. Under no such system
d. Periodic

12. Under this inventory system, a physical count is necessary only for internal control

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 Inventories

purposes.
a. Perpetual
b. FIFO
c. Under no such system
d. Periodic

13. Inventories are measured at

a. cost.
b. net realizable value.
c. replacement cost.
d. lower of a and b

14. ENDEAVOR TO TRY Co. purchased goods on account with a list price of P10,000 and
the following terms: 20%, 10%, 2/10, n30. If ENDEAVOR uses the net method of
accounting for cash discounts, the amount debited for the purchase is computed as
a. P10K x 80% x 90% x 98%
b. P10K x 20% x 10% x 2%
c. P10K x 80% x 90%
d. P10K x 90% x 80% x 89%

15. Under the gross method of recording purchases,

a. cash discounts are initially ignored and are recorded only when taken.
b. cash discounts are deducted from the cost of inventory on initial recognition.
c. cash discounts not taken are debited to a “purchase discounts lost” account.
d. a and c
16. ZENITH HIGHEST POINT Co. buys and sells antiques. Each product is unique. If ZENITH
adopts PAS 2 Inventories, ZENITH Co.
a. is required to use specific identification.
b. is required to use FIFO.
c. has the option of using either FIFO or specific identification.
d. has the option of using specific identification, FIFO or the average method,
but not LIFO.

17. When applying the lower of cost and net realizable value (NRV), inventories are
a. usually written down to net realizable value on an item by item basis.
b. usually not written down below fair value.
c. usually written down to net realizable value on a per classification basis, e.g.,
as finished goods, work-in-process, and raw materials.
d. all of these

18. According to PAS 2 Inventories, the best evidence of the net realizable value of raw

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 Inventories

materials is
a. estimated selling price less costs to sell
b. estimated selling price less costs to complete and costs to sell.
c. replacement cost.
d. fair value less costs to sell.

19. Raw materials and manufacturing supplies held for use in the production of
inventories are
a. required under PAS 2 Inventories to be presented separately from the other
inventories.
b. not disclosed since they are normally immaterial.
c. not written down below cost if the finished products in which they will be
incorporated are expected to be sold at or above cost.
d. all of these

20. Reversals of inventory write-downs

a. are not prohibited under the PFRSs.
b. should not exceed the amount of write-downs previously recognized.
c. are always recognized in profit or loss.
d. all of these

PROBLEM 6: MULTIPLE CHOICE: COMPUTATIONAL

1. Assume that a company records purchases net of discount. If the company bought
merchandise valued at P10,000 on credit terms 3/15, net 30, the entry to record a
payment for half of the purchase within the discount period would include a debit to
a. Accounts Payable for P4,850 and a credit to Cash for P4,850.
b. Accounts Payable for P5,000 and a credit to Cash for P5,000.
c. Accounts Payable for P4,850 and to Interest Expense for P150, and a credit to
Cash for P5,000.
d. Accounts Payable for P5,000 and Interest Revenue for P150 and to Cash for
P5,000.

2. On August 1, Stephan 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
a. 178,400 176,400
b. 176,400 176,400

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 Inventories

c. 176,400 178,400
d. 180,000 176,400
Explanation:
Net method [(80k + 98%]= 176,000
Gross method (80k x 98%)= 178,400

3. Ami Retailers purchased merchandise with a list price of P100,000, subject to a trade
discount of 20 percent and credit terms of 2/10, n/30. At what amount should Ami
record the cost of this merchandise if the gross method is used?
a. 100,000
b. 80,000
c. 98,000
d. 78,400
Explanation:
100k x 80% = 80,000

4. The following information applied to Landon Company for 2002:

Merchandise purchased for resale ..………….. P300,000
Freight-in ……………………………………. 7,500
Interest on notes payable to vendors ………… 3,000
Purchase returns ……………………………. 1,500

Landon’s inventoriable cost for 2002 was

a. 309,000
b. 307,500
c. 306,000
d. 301,500
Explanation:
300,000+7,500-1,500= 306,000

5. The following information is available from Preston Company’s 2002 accounting

records:
Purchases …………………………………. P530,000
Purchase discounts ……………………………. 10,000
Beginning inventory …………………………….. 160,000
Ending inventory …………………………….. 215,000
Freight-out …………………………… 40,000

Preston’s 2002 cost of goods sold is

a. 465,000
b. 475,000

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 Inventories

c. 505,000
d. 585,000
Solution:
inventory
160,000
beg. 0 10,000 Purchase disc.
530,000
Purchases 0 465,000 COGS (squeeze)

215,000 End.

6. Following are the account balances from Fulton Company’s income statement:
Inventory, January 1, 2002 …………………………….. P30,000
Purchases …………………………………………… 40,000
Purchase Returns and Allowances ……………………….. 5,000
Purchase Discounts ……………………………………… 4,000
Freight-In ……………………………………………… 5,000
Inventory, December 31, 2002 ……………………………. 15,000
Freight-Out ……………………………………………… 6,000

Given this information, the cost of goods sold during 2002 is

a. 51,000
b. 46,000
c. 56,000
d. 66,000
Solution:
inventory
beg. 30,000
Purchases 40,000 5,000 Purchase ret. and allow.
Freight in 5,000 4,000 Purchase disc.
51,000 COGS

15,000 End.

7. Following are the account balances from Jackson Company’s income statement:
Inventory, January 1, 2002 ………………………………. P35,000
Purchases …………………………………………………… 35,000
Purchase Returns and Allowances ……………………. 2,000
Purchase Discounts ………………………………………. 4,000
Freight-In ……………………………………………… 5,000

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 Inventories

Inventory, December 31, 2002 ……………………………. 10,000

Freight-Out ……………………………………………… 6,000

Given this information, the cost of merchandise available for sale during 2002 is
a. 65,000
b. 59,000
c. 69,000
d. 61,000
Use the following information for the next two questions:
Beginning Inventory …………………………………… P20,000
Purchases ………………………………………….. 41,000
Purchase Returns and Allowances …………………………… 3,000
Purchase Discounts …………………………………… 4,000
Freight-In ……………………………………….. ?
Cost of Goods Available for Sale …………………………… 55,000
Ending Inventory ……………………………………… ?
Cost of Goods Sold …………………………………….. 22,000

Solution:
Beg. 35,000
Purchases 35,000
Freight-in 5,000
Purchases ret. and allow. (2,000)
Purchase disc. (4,000)
Net purchases 34,000
TGAS 69,000

8. How much is the freight-in?

a. 3,000
b. 4,000
c. 2,000
d. 1,000
Solution:
TGAS 55,000
Beginning inventory (20,000)
Purchases (41,000)
Purchase returns and allowance 3,000
Purchase discounts 4,000
Freight in 1,000

9. How much is the ending inventory?

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 Inventories

a. 23,000
b. 32,000
c. 33,000
d. 22,000

Use the following information for the next two questions:

Miller Inc. is a wholesaler of office supplies. The activity for Model III calculators during
August is shown below:
Balance/
Date Transaction Units Cost

Aug. 1 Inventory 2,000 P36.00

7 Purchase 3,000 37.20

12 Sales 3,600

21 Purchase 4,800 38.00

22 Sales 3,800

29 Purchase 1,600 38.60

Solution:
TGAS 55,000
COGS (22,000)
Ending inventory 33,000

10. If Miller Inc. uses a FIFO periodic inventory system, the ending inventory of Model III
calculators at August 31 is reported as
a. 150,080
b. 150,160
c. 152,288
d. 152,960
Solution:
Date Balance/transaction Units Cost
Aug. 1 Inventory 2,000 P36,00
7 Purchase 3,000 37.2
12 Sales (3,600)
21 Purchase 4,800 38
22 Sales (3,800
29 Purchase 1,600 38.6
Ending inventory 4,000

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 Inventories

Units Unit cost Total cost

Ending inventory 4,000
From aug. 29 purchase (1,600) 38.6 61,760
Balance 2,400
From aug. 21 purchase (2,400) 38 91,200
As allocated 152,960

11. If Miller Inc. uses a FIFO cost perpetual inventory system, the ending inventory of
Model III calculators at August 31 is reported as
a. 150,080
b. 150,160
c. 152,232
d. 152,960

Use the following information for the next two questions:

Stephens Inc. is a wholesaler of photography equipment. The activity for the VTC cameras
during July is shown below:
Balance/
Date Transaction Units Cost

July 1 Inventory 2,000 P36.00

7 Purchase 3,000 37.00

12 Sales 3,600

21 Purchase 5,000 37.88

22 Sales 3,800

29 Purchase 1,600 38.11

Explanation
Same with FIFO periodic

12. If Stephens Inc. uses the average cost method to account for inventory, the ending
inventory of VTC cameras at July 31 is reported as
a. 153,400
b. 156,912
c. 158,736
d. 159,464

Solution:

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 Inventories

Date Balance/Transaction Units Cost Total cost

1-Jul Inventory 2,000 36.0 72,000
0
7 Purchase 3,000 37.00 111,000
21 Purchase 5,000 37.88 189,400
29 Purchase 1,600 38.11 60,976
Total goods available for sale 11,600 433,376
Average cost = 433,376÷19,000=22.81

Date Balance/ Transaction Units

1-Jul Inventory 2,000
7 Purchase 3,000
12 Sales (3,600)
21 Purchase 5,000
22 Sales (3,800)
29 Purchase 1,600
Ending inventory 4,200
Average cost 37.36
Ending inventory in pesos 156,912

13. If Stephens Inc. uses a moving average perpetual inventory system, the ending
inventory of the VTC cameras at July 31 is reported as
a. 153,400
b. 156,912
c. 158,736
d. 159,464

Use the following information for the next two questions:

Campbell’s Clothing Store sells jeans. During January 2002, its inventory records for one
brand of designer jeans were as follows:
Beginning Inventory ……………………. 10 pairs @ P20 = P200
January 6 Purchase …………………… 4 pairs @ 25 = 100
January 10 Sale ………………………. 5 pairs
January 15 Purchase …………………. 7 pairs @ 30 = 210
January 20 Sale ………………………. 10 pairs
January 25 Purchase …………………. 4 pairs @ 30 = 120

Solution:
Date Transaction Units Cost Total cost

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 Inventories

1-Jul Inventory 2,000 36.00 72,000

7 purchase 3,000 37.00 111,000

Total 5,000 36.60 183,000

12 Sales (3,600) 36.60 (131,760)
21 Purchase 5,000 37.88 189,400

Total 6,400 37.60 240,640

22 Sales (3,800) 37.60 (142,880)
29 Purchase 1,600 38.11 60,976
Ending inventory 4,200 158,736

14. How much is the cost of goods sold using periodic FIFO?
a. 330
b. 300
c. 430
d. 250
Solution:
Ending inventory in units is computed as follows:
Units
Beg. 10
January 6 purchase 4
January 10 sale (5)
January 15 purchase 7
January 20 sale (10)
January 25 purchase 4
Ending inventory 10

Total goods available for sale in pesos is computed as follows:

Units Unit cost Total cost
beg. 10 20 200
January 6 purchase 4 25 100
January 15 purchase 7 30 210
January 25 purchase 4 30 120
TGAS 25 630

FIFO cost of goods sold is computed as follows:

Units Unit cost Total cost
Ending inventory 10
From jan. 25 purchase (4 ) 30.0 120
Balance 6
From jan. 15 purchase (6) 30 180

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 Inventories

As allocated - 300

FIFO cost of goods sold is computed as follows:

TGAS 630
Ending inventory (252)
COGS 378

15. How much is the cost of goods sold using the average cost method?
a. 378
b. 358
c. 265
d. 236

Solution:
TGAS in pesos ( see previous solution) 630
Divided by:TGAS in units (see previous solution 25
Average unit cost 25.20
Multiply by: El in units (see previous solution) 10
Average El 252.00

TGAS in pesos (see previous solution) 630

Average El (252)
COGS 378

16. With LIFO, cost of goods sold is P195,000 and ending inventory is P45,000. If FIFO
ending inventory is P65,000, how much is FIFO cost of goods sold?
a. 215,000
b. 195,000
c. 175,000
d. 65,000
Solution:
Total goods available for sale is computed based on information under LIFO as follows:

Cost of goods sold (LIFO) 195,000

Ending inventory in pesos (LIFO) 45,000
Total goods available for sale 240,000

Using the concept that total goods available for sale is the same under both FIFO and LIFO,
the FIFO cost of goods sold is simply squeezed as follows:

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 Inventories

LIFO FIFO
TGAS in pesos 240,00 240,00 extended from
0 0 LIFO
Ending inventory in pesos (45,000)(65,000) given information
195,00 175,00
Cost of goods sold 0 0 squeezed

17. Gordon company’s inventory at june 30,2002, was P75,000 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 count were goods billed to a customer FOB shipping
point on june 30,2002. These goods had a cost of P1,500 and were picked up
by the carrier on july 10,2002.
● Goods shipped FOB destination on june 28,2002, from a vendor to gordon
were received on july 3,2001. The invoice cost was P2,500

What amount should Gordon report as inventory on its july 30,2002, balance sheet?
a. 73,500
b. 74,000
c. 75,000
d. 76,500

Explanation:
No adjustment is necessary for the foregoing.
● The goods are properly included in inventory because they were shipped only on July
10,2002, after the June 30,2002 cut-off date
● The goods purchased FOB destination are properly excluded from inventory because
they are not yet received as cut-off date.

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