Page |1

Chapter 7
Inventories

PROBLEM 1: TRUE OR FALSE

1. TRUE – i.e., finished goods, work in process, and raw
materials & supplies
2. FALSE
3. FALSE – consignor
4. FALSE – e.g., increase in inventory resulting from cash
purchases
5. TRUE
6. FALSE (₱3 + ₱4 = ₱7)
7. FALSE (₱2 – the cost of the red apple)
8. FALSE (2 + 3 + 4) / 3 apples x 2 apples on hand = ₱6
9. TRUE
10. TRUE

PROBLEM 2: MULTIPLE CHOICE – THEORY

1. D - Assets used in producing goods (e.g., factory equipment)
or in rendering services (e.g., dental chair) are classified as
PPE.

2. D
3. B
4. A
5. C – memo entry
6. A
7. C
8. A
9. D
10. D
11. D
12. D
13. A
14. A
 Page |2

15. C
16. A
17. A
18. C
19. C
20. D

PROBLEM 3: EXERCISES
1. Solutions:
Requirement (a): FOB shipping point, Freight collect
Dec. 31, Purchases 100,000
20x1 Accounts payable 100,000
Jan. 2, Freight-in 10,000
20x2 Cash 10,000
Jan. 5, Accounts payable 100,000
20x2 Cash 100,000

Requirement (b): FOB destination, Freight prepaid

Dec. 31, No entry -
20x1 -
Jan. 2, Purchases 100,000
20x2 Accounts payable 100,000
Jan. 5, Accounts payable 100,000
20x2 Cash 100,000

Requirement (c): FOB shipping point, freight prepaid

Dec. 31, Purchases 100,000
20x1 Freight-in 10,000
Accounts payable 110,000
Jan. 2, No entry -
20x2 -
Jan. 5, Accounts payable 110,000
20x2 Cash 110,000
 Page |3

Requirement (d): FOB destination, Freight collect

Dec. 31, No entry -
20x1 -
Jan. 2, Purchases 100,000
20x2 Accounts payable 90,000
Cash 10,000
Jan. 5, Accounts payable 90,000
20x2 Cash 90,000

2. Solution:
Perpetual system Periodic system
(a)
Inventory 54,000 Purchases 50,000
Accounts payable 50,000 Freight-in 4,000
Cash 4,000 Accounts payable 50,000
Cash 4,000
(b)
Accounts payable 5,000 Accounts payable 5,000
Inventory 5,000 Purchase returns 5,000

(c)
Accounts receivable 90,000 Accounts receivable 90,000
Sales 90,000 Sales 90,000

Cost of goods sold 30,000 No entry

Inventory 30,000

(d)
Sales returns 6,000 Sales returns 6,000
Accounts receivable 6,000 Accounts receivable 6,000

Inventory 2,000 No entry

Cost of goods sold 2,000
 Page |4

3. Solution:
Effect of error on:
Nature of error
Gross profit COGS
a. Overstatement of beginning inventory Under Over
b. Understatement of purchases Over Under
c. Overstatement of purchase returns Over Under
d. Understatement of purchase returns Under Over
e. Overstatement of ending inventory Over Under
f. Understatement of ending inventory Under Over

4. Solution:

Gross method Net method

Purchase of inventory
Purchases 90,000 Purchases 88,200
Accounts payable 90,000 Accounts payable 88,200

(i) Payment is made within discount period

Accounts payable 90,000 Accounts payable 88,200
Purchase discounts 1,800 Cash 88,200
Cash 88,200

(ii) Payment is made beyond discount period.

Accounts payable 90,000 Accounts payable 88,200
Cash 90,000 Purchase discount lost 1,800
Cash 90,000

5. Solution:
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
 Page |5

PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL

1. B
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. C – the amount based on the physical count. No adjustment is

necessary:
• 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.

3. D
Solution:
Warehouse Consigned goods Total
Beginning inventory 110,000 12,000
Purchases 480,000 60,000
Freight in 10,000
Transpo. to consignees 5,000
TGAS 600,000 77,000
Ending inventory (145,000) (20,000)
Cost of goods sold 455,000 57,000 512,000

4. D
Mark-up on unsold consigned goods (40K x 40%) 16,000
Goods held on consignment by Opal 27,000
Total reduction in inventory 43,000
 Page |6

5. C Net method [(80K + 100K) x 98%] = 176,000

Gross method (80K x 98%) + 100K = 178,400

6. C
➢ Inventory (380,000 x 98% = 372,400);
➢ Accounts payable: 372,400 initial measurement + 7,600
adjustment on Dec. 31, 20x1 = 380,000

Initial recognition on Dec. 15, 20x1:

Purchases (380,000 x 98%) 372,400
Accounts payable 372,400

Adjusting entry on Dec. 31, 20x1:

Purchase discount lost (380,000 x 2%) 7,600
Accounts payable 7,600

7. A
Solution:
EI: 200,000 x 98% x 10% = 19,600
COGS: 200,000 x 98% x 90% = 176,400

8. C
Solution:
I. Discount is allocated only to the goods sold:
Gross amts. Allocation of discount Net amounts
EI (200K x 10%) 20,000 - 20,000
COGS (200K x 90%) 180,000 3,200 176,800
Total 200,000 3,200

II. Discount is allocated to both EI and COGS:

Gross amts. Allocation of discount Net amounts
EI (200K x 10%) 20,000 320* 19,680
COGS (200K x 90%) 180,000 2,880* 177,120
Total 200,000 3,200
 Page |7

* (3,200 x 10%); (3,200 x 90%)

9. D
Solutions:
FIFO periodic
➢ Ending inventory, in units = 1,400 – 400 + 800 – 900 + 700 – 600
= 1,000 units

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. 1,400 24 33,600
14 Purchase 800 35 28,000
24 Purchase 700 30 21,000
TGAS, in pesos 82,600

TGAS in pesos 82,600

Ending inventory, in pesos (31,500)
Cost of goods sold 51,100
 Page |8

FIFO perpetual
➢ SAME AS FIFO PERIODIC

or

Unit
Date Transaction Quantity Cost In pesos
June 1 Balance 1,400 24 33,600
8 Sale 400 24 (9,600)
14 Purchase 800 35 28,000
18 Sale 900 24 (21,600)
24 Purchase 700 30 21,000
29 Sale 600
100 from June 1 24 (2,400)
500 from June 14 35 (17,500)
Ending inventory 31,500
Cost of goods sold (9,600 + 21,600 + 2,400 + 17,500) 51,100

10. A
Solutions:
Weighted average periodic

Weighted Ave. Unit cost = TGAS, in pesos ÷ TGAS, in units

➢ TGAS, in units = 1,400 + 800 + 700 = 2,900 units

Weighted Ave. Unit cost = ₱82,600 (see previous solution) ÷ 2,900

Weighted Ave. Unit cost = ₱28.48

Ending inventory = ₱28.48 x 1,000 units = 28,480

TGAS in pesos 82,600

Ending inventory, in pesos (28,480)
Cost of goods sold 54,120
 Page |9

Weighted average perpetual

Date Transaction Quantity Unit Cost In pesos
June 1 Balance forwarded 1,400 24 33,600
8 Sale (400) (9,600)
14 Purchase 800 35 28,000
Totals 1,800 28.89 52,000
18 Sale (900) (26,001)
24 Purchase 700 30 21,000
Totals 1,600 29.37 46,999
29 Sale (600) (17,622)
Ending inventory 1,000 29,377

Cost of goods sold (9,600 + 26,001 + 17,622) 53,223

11. C
Solution:
FIFO – periodic
Beginning inventory in units 2,000
Net purchases in units (3,000 + 4,800 + 1,900 – 300) 9,400
Total goods available for sale in units 11,400

Total goods available for sale in units 11,400

Quantity of goods sold (4,200 – 600 + 3,800) (7,400)
Ending inventory in units 4,000

Unit Total
Units
cost cost
Ending inventory to be allocated 4,000
Allocated as follows:
From Nov. 29 net purchases
(1,900 - 300) (1,600) ₱38.60 ₱ 61,760
Bal. to be allocated to the next most
2,400
recent purchase date
From Nov. 21 purchase (2,400) 38.00 91,200
Ending inventory at cost - ₱152,960
 P a g e | 10

Total goods available for sale in pesos (see below) 427,760

Ending inventory at cost (152,960)
Cost of goods sold 274,800

❖ TGAS in pesos:
Date Transaction Units Unit cost Total cost
1-Aug Inventory 2,000 ₱ 36.00 ₱ 72,000
7 Purchase 3,000 37.20 111,600
21 Purchase 4,800 38.00 182,400
29 Purchase 1,900 38.60 73,340
30 Purchase return 300 38.60 (11,580)
Total goods available for sale ₱ 427,760

FIFO – perpetual
➢ SAME AS FIFO PERIODIC

12. A
Solution:
Weighted Average - Periodic
Weighted average unit cost = (₱427,760 (a) ÷ 11,400 (a)) = ₱37.52
(a) see previous computations

Ending inventory in units (refer to previous computation) 4,000

Multiply by: Weighted average unit cost 37.52
Ending inventory at cost 150,080

Total goods available for sale in pesos (refer to previous table) 427,760
Ending inventory at cost (150,080)
Cost of goods sold 277,680
 P a g e | 11

Weighted Average – Perpetual

Date Transaction Units Unit cost Total cost
1-Nov Inventory 2,000 ₱36.00 ₱72,000
7 Purchase 3,000 37.20 111,600
Moving average unit cost =
5,000 36.72 183,600
(₱183,600 ÷ 5,000)
12 Sales (4,200) 36.72 (154,224)
15 Purchase 4,800 38.00 182,400
Moving average unit cost =
5,600 37.82 211,776
(₱211,776 ÷ 5,600)
16 Sales returns 600 36.72 22,032
Moving average unit cost =
6,200 37.71 233,808
(₱233,808 ÷ 6,200)
22 Sales (3,800) 37.71 (143, 298)
29 Purchase 1,900 38.60 73,340
30 Purchase returns (300) 38.60 (11,580)
Ending inventory in units & at cost 4,000 ₱ 152,270

Cost of goods sold (Nov. 12, ₱154,224 – ₱22,032 Sales returns + Nov. 22,
₱143,298 = ₱275,490)

13. C
Solution:
❖ Concept: TGAS is the same under LIFO and FIFO.

TGAS in pesos (195,000 LIFO COGS + 65,000 LIFO) 240,000

FIFO Ending inventory in pesos (65,000)
FIFO Cost of goods sold 175,000

14. A
Solution:
Invoice price inclusive of VAT 112,000
VAT (12,000)
Shipping costs 40,000
Transit insurance 12,000
Commission to broker 5,600
Cost of inventory 157,600
 P a g e | 12

15. C
Solution:
Sales 1,000,000
Sales discounts (50,000)
Sales returns (10,000)
Net sales 940,000
Cost of goods sold:
Beginning inventory 60,000
Purchases 500,000
Purchase returns (25,000)
Purchase discounts (10,000)
Freight-in 60,000
TGAS 585,000
Ending inventory (75,000) (510,000)
Gross profit 430,000

The freight-out and commission expense are presented as other

operating expenses; thus, they do not affect the computation of
gross profit.

16. C
Solution:
X Y Z Total
Cost (50 + 5); (30 + 4); (109 + 68) 55 34 177
NRV (56 - 4); (60 - 8); (250 - 75) 52 52 175
Lower 52 34 175
No. of units 3,700 2,500 1,300
Total 192,400 85,000 227,500 504,900

17. D – Raw materials are not written-down if the finished goods

in which they will be incorporated are expected to be sold at
or above cost.
 P a g e | 13

18. B – The recovery in 20x2 of ₱40,000 (490,000 – 450,000) exceeds

the previous write-down. Thus, the amount of reversal
recognized is limited to the previous write down of ₱30,000
(410,000 – 440,000).

19. B
Solution:
Inventory
beg. 60,000
Net purchases, excldg.
freight in 465,000
Freight-in (squeeze) 60,000
510,000 COGS
75,000 end.

OR

Inventory
beg. 60,000
Purchases 500,000 25,000 Purchase returns
Freight-in (squeeze) 60,000 10,000 Purchase discounts
510,000 COGS
75,000 end.

TGAS = 510,000 COGS + 75,000 EI = 585,000;

OR

TGAS = 60,000 BI + (500,000 – 25,000 – 10,000 + 60,000) Net

purchases = 585,000
 P a g e | 14

20. A
Solution:
Inventory
beg. 60,000
Purchases 500,000 25,000 Purchase returns (squeeze)
Freight-in 60,000 10,000 Purchase discounts
510,000 COGS
75,000 end. (585K TGAS – 510K COGS)

PROBLEM 5: CLASSROOM ACTIVITIES

ACTIVITY 1:
Solutions:
(a) The sale terms are FOB SHIPPING POINT and Freight
COLLECT. (see ‘COD’ Cash On Delivery on Bill of Lading)

(b) Journal entry:

(i) Perpetual inventory system:

JOURNAL
DATE ACCOUNTS Ref. Debit Credit
9/27/X1 (a) Inventory 8,689.29(b)
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, i.e., the date Wictory Liner receives
the goods from XYZ, Inc.
(b) Purchase price net of VAT ₱7,589.29 + Freight (₱900.00 bill of lading

+ ₱200.00 porter fee) = ₱8,689.29 cost of purchase

 P a g e | 15

(ii) Periodic inventory system:

JOURNAL
DATE ACCOUNTS Ref. Debit Credit
9/27/X1 Purchases 7,589.29 (c)
Freight-in 1,100.00 (d)
Input VAT 910.71
Accounts payable 8,500.00
Cash 1,100.00
to record the purchase of inventory

(c) Purchase price net of VAT

(d) ₱900.00 bill of lading + ₱200.00 porter fee = ₱1,100

ACTIVITY 2:
Solutions:
1. Specific Identification:
a. Ending inventory ₱11.75
b. Cost of goods sold ₱7.00 – the cost of item “broken”

2. FIFO:
a. Ending inventory ₱13.00
b. Cost of goods sold ₱5.75 – the cost of item “happy”

3. Weighted Average Cost:

a. Ending inventory (₱5.75 + ₱6.00 + ₱7.00) - ₱6.25 = ₱12.50
b. Cost of goods sold (₱5.75 + ₱6.00 + ₱7.00) ÷ 3 = ₱6.25
 P a g e | 16

PROBLEM 6: FOR CLASSROOM DISCUSSION

1. Solution:
Cost of inventory Net cash payment
Scenarios: on Dec. 31 on Jan. 5
a. FOB Destination,
Freight prepaid None 100,000
b. FOB Shipping point,
Freight collect 100,000* 100,000
c. FOB Destination,
Freight collect None 94,000
d. FOB Shipping point,
Freight prepaid 106,000 106,000

* The ₱6,000 freight-in is recorded on Jan. 2, 20x2 when Entity A

accepts delivery from the carrier. On Jan. 2, 20x2, the total cost of
the inventory would be increased to ₱106,000.
If, however, Entity A receives notice of the shipment cost
from the carrier beforehand, the freight-in would have been
recorded on December 30, 20x1 (shipment date). Accordingly, the
cost of inventory on December 31, 20x1 would be ₱106,000.
Entity A may also want to estimate the freight cost and
records it on Dec. 30, 20x1 or Dec. 31, 20x1. This, however, is
seldom done in practice.

2. Solution:
Unadjusted balance 180,000
(a) Goods received on consignment (30,000)
(d) Unsold goods sent out on consignment (18,000 x 1/2) 9,000
(e) Freight on unsold goods out on consignment (2,000 x 1/2) 1,000
Adjusted balance 160,000
 P a g e | 17

3. Solution:
Inventory Accounts payable
Unadjusted balances 500,000 120,000
(a) 60,000 -
(b) (80,000) (80,000)
(c) 50,000 50,000
(d) 30,000 -
Adjusted balances 560,000 90,000

4. Solution:
a. Inventory on display shelves 100,000
b. Inventory stocked in warehouse 250,000
c. Inventory sold under a bill and hold arrangement (20,000)
d. Inventory purchased on installment basis 30,000
e. Inventory pledged as collateral security for a bank loan 60,000
g. Inventory sold with repurchase agreement 10,000
430,000

5. Solutions:
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
 P a g e | 18

Cost of goods sold 380,000 No entry

Inventory 380,000

(e)
Sales returns 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 (380,000 – 4,275) (375,725)
Gross profit 415,275

Periodic system

Sales 800,000
Sales returns (9,000)
Net sales 791,000
Cost of sales:
Beginning inventory 20,000
Net purchases (450K + 25K – 10K) 465,000
Total goods avail. for sale 485,000
Ending inventory (109,275) (375,725)
Gross profit 415,275
 P a g e | 19

6. 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

The advertisement costs are selling costs. These are

expensed in the period in which they are incurred.

7. Solution:
Gross method Net method
Jan. 1, 20x1
Purchases 144,000* Purchases 136,800*
Accounts payable 144,000 Accounts payable 136,800

*(₱200,000 x 80% x 90%) *(₱200,000 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)
 P a g e | 20

8. Solution:
Requirement (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

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

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

Requirement (b): FIFO Perpetual

Answers are the same with FIFO Periodic.

OR
Unit
Units Total Cost
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 2,250 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

 P a g e | 21

Requirement (c): Weighted Average Cost Periodic

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

Ending inventory in units 5,550

Multiply by: Wtd. Ave. Cost 20.99
Ending inventory in pesos 116,494.50

TGAS in pesos 324,300

Less: Ending inventory in pesos (116,494.50)
COGS 207,805.50

Requirement (d): Weighted Average Cost Perpetual

Unit
Units Total Cost
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 (151,056)
Ending inventory 5,550 116,382

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

 P a g e | 22

9. Solutions:
Requirement (a):
Product A Product B Product C Total
Purchase price 100,000 250,000 300,000
Freight-in 12,000 30,000 36,000
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

10. 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 (i.e., 250K recovery
vs. 200K previous write-down).