Chapter 12: Inventories

CHAPTER 12: INVENTORIES

PROBLEM 12-1 Cost of Purchase
Purchase price based on vendors’ invoices 1,250,000
Brokerage commission paid to agents for arranging imports 50,000
Import duties 100,000
Freight and insurance on purchases 250,000
Other handling costs relating to imports 25,000
Total cost of purchase (B) P1,675,000
Note that the trade discount was already deducted in arriving at the vendor’s
invoice.

PROBLEM 12-2 Inventoriable Cost

Materials ₱ 350,000
Irrecoverable purchase taxes 30,000
Labor 120,000
Variable production overhead 50,000
Fixed production costs 40,000
Cartage in 8,000
Total (C) ₱598,000

PROBLEM 12-3 Rebates

Question No. 1
Invoice price (no VAT is charged on these goods) ₱ 850,000
Less: Rebate offered to the entity by the supplier 10,000
Inventoriable cost (B) ₱ 840,000

Question No. 2
Inventoriable cost (C) ₱ 850,000

PROBLEM 12-4 FREIGHT TERMS & FOREIGN EXCHANGE

Question No. 1 Free on Board
Cost of inventory ($100,000 x ₱45) ₱4,500,000
ForEx loss (₱46.875 - ₱45) x 100,000 (A) 187,500

Question No. 2 Cost, Insurance and Freight

Cost of inventory ($100,000 x ₱45.625) ₱4,562,500
ForEx loss (₱46.875 - ₱45.625) x 100,000 (D) 125,000

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PROBLEM 12-5 MANUFACTURING COST

Question No. 1
Variable cost:
Direct labor (₱3 x 3 DLH x 100,000 units) ₱ 900,000
Direct materials (₱2 excluding VAT x 100,000 units) 200,000
Fixed Cost (₱100,000 / 100,000 normal capacity) x 100,000 actual 100,000
Total cost (C) ₱1,200,000

Question No. 2
Variable cost:
Direct labor (₱3 x 3 DLH x 120,000 units) ₱1,080,000
Direct materials (₱2 excluding VAT x 120,000 units) 200,000
Fixed Cost (₱100,000 / 120,000 actual capacity) x 100,000 actual 100,000
Total cost (C) ₱1,420,000

Question No. 3
Variable cost:
Direct labor (₱3 x 3 DLH x 80,000 units) ₱ 720,000
Direct materials (₱2 excluding VAT x 80,000 units) 160,000
Fixed Cost (₱100,000 / 100,000 normal capacity) x 80,000 actual 80,000
Total cost (D) ₱ 960,000

PROBLEM 12-6 Items to be Included in the Inventory

1 Items in the warehouse during the count P1,090,000
2 Items out on consignment at another company's store 70,000
Items purchased FOB shipping point that are in transit at
4 December 31 500,000
5 Freight charges on goods purchased above 13,000
Items sold to another company, for which our company
has signed an agreement to repurchase at a set price that
covers all costs related to the inventory. Total cost of
7 merchandise is 200,000
Items sold FOB destination that are in transit at December
10 31, at cost 75,000
14 Items currently being used for window display 100,000
15 Items on counter for sale 400,000
17 Items included in the count, damaged and unsalable (150,000)
Items in receiving dept., returned by customer, in good
18 condition (not included in the count) 50,000
19 Merchandise inventories out on approval, at cost 100,000
Finished special article goods, made to order (included in
20 the count) (78,000)
Total (A) P2,370,000

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The following items would not be reported as inventory:

3 Cost of goods sold in the income statement 40,000
6 Not reported in the financial statements 300,000
8 Cost of goods sold in the income statement 30,000
9 Cost of goods sold in the income statement 50,000
11 Advertising exp. In the income statement 10,000
12 Not reported in the financial statements 100,000
13 Temporary investments in the current
assets section of the balance sheet 125,000
16 Not reported in the financial statements 360,000
21 Office supplies in the current asset
section of the balance sheet 40,000

PROBLEM 12-7 Accounts Payable

Unadjusted balance 1,800,000
Goods acquired in transit, FOB shipping point 100,000
Goods lost in transit 50,000
Adjusted Accounts Payable (A) P1,950,000
The journal entry on item 2 would include the following:
Purchases / Inventory 50,000
Accounts Payable 50,000
To record the purchase on December 20.
Query: For F/S presentation on December 31, is the goods lost in transit be
presented as part of inventory?
Answer: No, since the inventories were lost in transit and it is improper to
report inventories that is not existing (i.e. it violates the existence assertion).
Thus the journal entry at December 31 if no claim was filed and the common
carrier has yet to acknowledge the claim may include a:
Loss on goods lost in transit (preferably presented as 50,000
other expense and not as cost of goods sold)
Inventory / Purchases 50,000
And on the next year (January 5), when the claim was filed and acknowledged
by the common carrier, the journal entry will be:
Claims from common carrier 50,000
Gain on reimbursement of lost inventory 50,000
To record the claim against common carrier on January 5.

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PROBLEM 12-8 Consigned Goods

Inventory shipped on consignment to Lomasoc 360,000
Freight by Desiree to Lomasoc 18,000
Total Inventoriable cost (D) P 378,000

PROBLEM 12-9 Gross method vs. Net method

CASE NO 1: Gross method
Date Accounts Debit Credit
01/02 Purchases (100,000 x [1-20%]) 80,000
Accounts payable 80,000
01/12 Accounts payable 80,000
Cash (80,000 x [1-98%]) 78,400
Purchase discount 1,600
01/14 Accounts payable 80,000
Cash 80,000
CASE NO 2: Net method
Date Accounts Debit Credit
01/02 Purchases (100,000 x [1-20%]
x [1-2%]) 78,400
Accounts payable 78,400
01/12 Accounts payable 78,400
Cash (80,000 x [1-98%]) 78,400
01/14 Accounts payable 78,400
Purchase discount lost 1,600
Cash 80,000

SUMMARY OF ANSWERS:
CASE NO. 1 CASE NO. 2
1. B 5. C
2. C 6. C
3. D 7. A
4. A 8. D

PROBLEM 12-10 Cost Formulas - Different Methods

Question Nos. 1 and 2
Weighted average
Weighted average Total goods available for sale (in peso value)
=
unit cost Total goods available for sale (in units)
Weighted average = 1,105,000
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unit cost 85,000

Weighted average unit cost = P13/unit
Inventory end (40,000 x 13) = P520,000 (C)
Cost of goods sold (20,000+5,000+21,000–1,000) x 13 = P585,000 (C)

Question Nos. 3 and 4

Moving average
Units Unit cost Total cost
April 1 balance 20,000 10 200,000
Apr. 2 Purchase 30,000 12 360,000
Balance 50,000 11 560,000
Apr. 4 Sale (25,000) 11 (280,000)
Balance 25,000 11 280,000
Apr. 10 Purchase 15,000 14 210,000
Balance 40,000 12 490,000
Apr. 15 Sales (21,000) 12 (257,250)
Balance 19,000 12 232,750
Apr. 17 Sales return 1,000 12 12,250
Apr. 28 Balance 20,000 245,000
Apr. 28 Purchase 20,000 16.75 335,000
Balance 40,000 15 580,000

Inventory end = P580,000 (A)

Cost of goods sold (280,000 + 257,250 – 12,250) = P525,000 (A)

Question Nos. 5 and 6

FIFO
Units Unit cost Total cost
April 1 balance 20,000 10 200,000
Apr. 2 Purchase 30,000 12 360,000
Apr. 4 (25,000 units sold) From Apr. 1 (20,000) 10 (200,000)
From Apr. 2 (5,000) 12 (60,000)
Balance from Apr. 2 25,000 12 300,000
Apr. 10 Purchase 15,000 14 210,000
Apr. 15 (21,000 units sold) From Apr. 2 (21,000) 12 (252,000)
Balance from April 2 4,000 12 48,000
Balance from April 10 15,000 14 210,000
Apr. 17 Sales return 1,000 12 12,000
Balance
Balance from April 2 5,000 12 60,000
Balance from April 10 15,000 14 210,000
Apr. 28 Purchase 20,000 17 335,000
Total Balance 40,000 605,000

Inventory end = P605,000 (B)

Cost of goods sold (200,000 + 60,000 + 252,000 – 12,000) = P500,000 (B)
Question Nos. 7 and 8
Note that inventory and cost of goods sold under FIFO periodic and perpetual is
the same.

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SUMMARY OF ANSWERS:
1. C 2. C 3. A 4. A 5. B 6. B 7. B 8. B

PROBLEM 12-11 Lower of Cost or Net Realizable Value

Question No. 1 Raw Materials

Supply of steel (used for motorbikes) Write-down
Cost ₱ 40,000
More profitable (as is) 25,000 ₱ 15,000
Supply of aluminum (used for bicycles)
Cost ₱ 60,000
More profitable (completed product) 50,000 10,000
Total write-down (C) ₱ 25,000

Question No. 2 Work-in-process

Incomplete motorbikes Write-down
Cost ₱ 30,000
More profitable (completed product) 25,000 ₱ 5,000
Incomplete bicycles
Cost ₱ 50,000
More profitable (as is) 60,000 -
Total write-down (D) ₱ 5,000

Question No. 3 Finished goods

Motorbikes Write-down
Cost ₱ 80,000
More profitable (completed product) 60,000 ₱ 20,000
Bicycles
Cost ₱ 80,000
More profitable (completed product) 110,000 -
Total write-down (C) ₱ 20,000

Question No. 4 Adjusted COGS

Cost of goods sold before write-down ₱450,000
Add: Write-down
Raw materials 25,000
Work-in-process 5,000
Finished goods 20,000
Adjusted cost of goods sold (C) ₱500,000

PROBLEM 12-12 Purchase Commitment

CASE NO. 1
Date Accounts Debit Credit
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11/15 No entry
12/31 Loss on purchase commitment (20,000 x [25-20]) 100,000
Estimated liability for purchase commitment 100,000
03/15 Purchases (25,000 x 25) 500,000
Estimated liability for purchase commitment 100,000
Accounts payable/Cash 500,000
Gain on purchase commitment 100,000
CASE NO. 2
Date Accounts Debit Credit
11/15 No entry
12/31 No entry
03/15 Purchases (25,000 x 25) 500,000
Accounts payable/Cash 500,000

PROBLEM 12-15 Purchase Commitment

Date Accounts Debit Credit
3/31 No entry
12/31 Loss on purchase commitment (1,200,000-1,000,000) 200,000
Estimated liability for purchase commitment 200,000
04/30 Purchases 1,200,000
Estimated liability for purchase commitment 200,000
Accounts payable/Cash 1,200,000
Gain on purchase commitment 200,000

SUMMARY OF ANSWERS:
1. B 2. A

PROBLEM 12-13 Inventory Estimation - Gross Profit Rate Method

Sales 3,400,000
Less: Sales returns (30,000)
Net Sales excluding Sales discount 3,370,000
Multiply by: Cost ratio (1-30%) 70%
Cost of Goods sold 2,359,000
Inventory, January 1 650,000
Add: Net Purchases
Purchases 2,300,000
Add: Freight-in 60,000
Less: Purchase returns (80,000) 2,280,000
Total Goods available for sale 2,930,000
Less: Cost of goods sold (2,359,000)

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Merchandise inventory that should be on hand 571,000

Less: Actual merchandise inventory on hand (420,000)
Cost of Missing inventory (A) 151,000

PROBLEM 12-14 Inventory Estimation: Average Method - Retail Method

Computation of cost ratio:
Cost Retail
Inventory at January 1 250,000 375,000
Purchases 1,325,000 1,750,000
Net markups - 200,000
Net markdowns - (75,000)
Totals 1,575,000 2,250,000
Cost ratio (1,575,000 / 2,250,000) = 70%
Computation of Inventory end at retail
Balance up to markdowns (see above computation) 2,250,000
Less: Sales 1,500,000
Estimated normal shrinkage (1,500,000 x 5%) 75,000
Estimated normal shoplifting losses 50,000
Inventory end at retail P 625,000
Computation of Cost of goods sold
Total goods available for sale at cost 1,575,000
Less: Inventory end at cost (625,000 x 70%) 437,500
Cost of Sales (B) 1,137,500

PROBLEM 12-15 Inventory Estimation: FIFO Method - Retail Method

Computation of cost ratio:
Cost Retail
Purchases 292,500 400,000
Net markups - 75,000
Net markdowns - (25,000)
Totals 292,500 450,000
Cost ratio (292,500 / 450,000) = 65%
Computation of Inventory end at retail
Balance up to markdowns (see above computation) 450,000
Add: Inventory beginning 100,000
Less: Sales 375,000
Inventory end at retail P 175,000
Multiply: Cost ratio 65%
Inventory end at cost (A) P113,750

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PROBLEM 12-16
Transaction Delima Company Debit Credit
1. Shipment of No entry
goods
2. Receipt of cash Cash 1,500,000
A/P– product financing 1,500,000
3. Repayment of A/P– product financing 1,500,000
amount Financing cost 180,000
borrowed Cash 1,680,000

Transaction Financing Company Debit Credit

1. Shipment of No entry
goods
2. Disbursement A/R – product financing 1,500,000
Cash 1,500,000
3. Receipt of cash Cash 1,680,000
Finance income 180,000
A/R – product financing 1,500,000

PROBLEM 12-17
Question No. 1
A EI over (P129-P119) x 4,000 40,000
B EI under (70,000)
C EI over 100,000
Overstatement of ending inventory 70,000 (C)
Question No. 2
D. Ending inventory understated (140,000) (B)

Question Nos. 3 and 4

2015 2016
Unadjusted balance 1,000,000 1,200,000
A. EI over, NI over (P129-P119) x 4,000 (40,000) 40,000
B. EI under, NI under 70,000 (70,000)
C. EI over, NI over (100,000) 100,000
D. EI under, NI under 140,000
Adjusted balances 930,000 1,410,000
(A) (C)
Question No. 5
Unadjusted net income (1,000,000+1,200,000) 2,200,000
Less: Adjusted net income (930,000+1,410,000) 2,340,000
Net adjustment to income-understated (140,000) (D)

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SUMMARY OF ANSWERS:
1. C 2. B 3. A 4. C 5. D

PROBLEM 12-18
Question Nos. 1 and 2
Ledger Physical
Balance Count
Balances prior to adjustment P 314,800 P 293,600
Add: Goods in transit sold, FOB destination 3,200 3,200
Less: unrecorded sale ( 8,400) -
Less: unrecorded purchase returns ( 6,000) -
Less: goods held on consignment - ( 8,800)
Add: unrecorded purchase 3,640- -
Add: Goods in transit purchased, FOB shipping point 1,600
Add: Goods out on consignment - 14,800
Adjusted balances P 307,240 P 304,400
(A) (C)
Question No. 3
Adjusted balances, per ledger P 307,240
Adjusted balances, physical count 304,400
Inventory shortage P 2,840 (B)

SUMMARY OF ANSWERS:
1. A 2. C 3. B

PROBLEM 12-19
Note to the professor: Use the following guide questions in answering this
question:
1. Accounts Payable and related accounts
Was there a valid purchase?
Was the purchase recorded?
Were the inventories INCLUDED in the count?
2. Accounts Receivable and related accounts
Was there a valid sale?
Was the sale recorded?
Were the inventories EXCLUDED in the count?

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