CHAPTER 11

INVENTORY ESTIMATION

1.At the beginning of the current year, Casa company purchased a tract of land for
P12,000,000. Casa company incurred additional cost of P3,000,000 during the remainder
of the year in preparing the land for sale. The tract was subdivided into residential lots as
follows:

Lot Class Number of Lots Sales Price per Lot

A 100 240,000
B 100 160,000
C 200 100,000

Using the relative sales price method, what amount of cost should be allocated to Class A
lots?
a.3,000,000 c.6,000,000
b.3,750,000 d.7,200,000

Solution: Answer- c
Lot Class Fraction Allocated cost
A (100 x 240,000 24,000,000 24/60 6,000,000
B (100 x 160,000 16,000,000 16/60 4,000,000
C (100 x 100,000 20,000,000 20/60 5,000,000
60,000,000 15,000,000

2.The inventory card of Laina Company on February 28 is as follows:

Purchase Unit Balance
Cost Units used (units)
Jan 10 100 2,000 2,000
31 1,000 1,000
Feb 8 110 3000 4,000
9(return from factory,Jan 10 lot) (100) 4,100
28 1,100 3,000

What is the weighted average cost of the inventory on Feb.28?

a.318,000 c.312,000
b.315,000 d.330,000

Solution: answer- a
Units Unit cost Total cost
Jan 10 2,000 100 200,000
Feb 8 3,000 110 330,000
5,000 530,000

Weighted Average Unit Cost(530,000 x 5,000) = 106

Cost of Inventory(3,000 x 106) = 318,000

3. Anda Company uses the Moving Average method to determine the cost of its
inventory. During January of the current year, Anda recorded the following information
pertaining to its inventory:

units Unit cost Total cost

Balance on Jan 1 40,000 5 200,000
Sold on Jan 17 35,000
Purchase on June 28 20,000 8 160,000
What amount of inventory should be reported on Jan 31?
a.210,000 c.163,500
b.185,000 d.150,000

Solution: Answer- b
Units unit cost total cost
Jan 1 40,000 5 200,000
17 (35,000) 5 (175,000)
Balance 5,000 25,000
Jan 28 20,000 8 160,000
25,000 18 185,000

4.Sterling company is preparing its 2009 year-end financial statements. Prior to any
adjustments, inventory is valued at P7,600,000. The following information has been
found relating to certain inventory transactions:
 Goods valued at P1,000,000 are on consignment with a customer. These goods are
not included in the year-end inventory figure.
 Goods costing P250,000 wee received from a vendor on January 5, 2010. The
related invoice was received and recorded on January 12, 2010. These goods were
shipped on December 31, 2009, terms FOB shipping point.
 Goods costing P850,000 were shipped on December 31, 2009 and were delivered
to the customer on January 2, 2010, terms FOB shipping point. The goods were
included in ending inventory for 2009 even though the sale was recorded in 2009.
 A P350,000 shipment of goods to customer on December 31, 2009, terms FOB
destination were not included in the year-end inventory. The goods cost P260,000
and were delivered to the customer on January 8, 2010. The sale was properly
recorded in 2010.
 An invoice for goods costing P350,000 was received and recorded as a purchase on
December 31, 2009 shipped FOB destination, were received on January 2, 2010,
and thus were not included in the physical inventory.
 Goods valued at P650,000 are on a consignment from a vendor and not included in
the year-end inventory figure.
 A P1,050,000 shipment of goods to a customer on December 30, 2009, terms FOB
destination, was recorded as a sale in 2009. The goods costing P840,000 and
delivered to a customer on January 6, 2010, were not included in 2009 ending
inventory.

What is the correct inventory on December 31, 2009?

a. 9,100,000 c. 9,950,000
b. 8,100,000 d.9,450,000

Solution: answer - a
Inventory before adjustment 7,600,000
Goods out on consignment 1,000,000
Goods purchase, FOB shipping point 250,000
Goods sold, FOB shipping point (850,000)
Goods sold, FOB destination 260,000
Goods sold, FOB destination __840,000
9,100,000

5. On October 1, 2009, Grimm Company consigned 40 freezers to holden company

costing P14,000 each for sale at P20,000 each and paid P16,000 in transportation costs.
On December 30, 2009, Holden reported the sale of 10 freezers and remitted P170,000.
The remittance was net of the agreed 15% commission. What amount should Grimm
recognize as consignment sales revenue for 2009?
a. 154,000 c. 196,000
b. 170,000 d. 200,000

Solution: Answer- d
Freezers sold (10 x P20,000) P200,000

The entry in the books pf consignor to record the sale of the consigned goods and
the remittance from the consignee is:
Cash P170,000
Commission Expense (15% x 200,000) 30,000
Sales P200,000

6.On December 1, 2009, Alt department store received 505 sweaters on consignment
from Todd. Todd's cost for the sweater was P800 each, and they were priced to sell at
P1,000. Alt's commission on consigned goods is 10%. At December 31, 2009, 5 sweaters
remained. In its December 31, 2009 statement of financial position, what amount should
alt report as payable for consigned goods.

a. 490,000 c.450,000
b. 454,000 d. 404,000

Solution: answer – c
Sweaters sold (500 x 1,000) 500,000
Less: Commission (10% x 500,000) 50,000
Payable for consigned goods 450,000

Actually, the entry on the books of the consignee to record the sale of the consigned
goods is:
Cash 500,000
Commission Income 50,000
Accounts Payable 450,000

7.The following information was derived from the accounting records of Clem Company
for the current year:
 Clem's central warehouse Clem's goods held by
consignees

Beginning inventory : 1,100,000 120,000

Purchases 4,800,000 600,000
Freight in 100,000
Transportation to consignees: 50,000
Freight out 300,000 80,000
Ending inventory 1,450,000 200,000

Clem's cost of sales was:

a. 4,550,000 c.5,070,000
b. 4,850,000 d.5,120,000

Solution: Answer – d
Inventory, beginning 1,220,000
Purchases 5,400,000
Freight in 150,000
Goods available for sale 6,770,000
Ending inventory 1,650,000
Cost of sales 5,120,000

8.Brooke Company uses a perpetual inventory system. At the end of 2008, the balance in
the inventory account was P360,000 and P30,000 of those goods included in ending
inventory were purchased FOB shipping point and did not arrive until 2009. Purchases in
2009 were P3,000,000. The perpetual inventory records showed an ending inventory of
P420,000 for 2009.
A physical count of the goods on hand at he end of 2009, showed an inventory of
P380,000. Inventory shortages are included in cost of goods sold. What should the entity
report in its 2009 income statement for cost of goods sold?

a. 2,940,000 c.3,000,000
b. 2,980,000 d.3,010,000

Solution: Answer- b
Inventory- 12/31/2008 360,000
Purchases- 2009 3,000,000
Goods available for sale 3,360,000
Inventory- 12/31/2009 __(380,000)
Cost of goods sold 2,980,000

The physical inventory of 420,000 rather than the perpetual inventory of P420,000 is
considered in computing cost of goods sold because inventory shortages are included in
cost of goods sold.

9.On December 26, 2009, Branigan Company purchased goods costing P1,000,000. The
terms were FOB shipping point. Costs incurred of Branigan Company in connection with
the purchase and delivery of the goods were as follows:
Normal freight charge 30,000
Handling cost 20,000
 Insurance on shipment 5,000
Abnormal freight charge for express shipping 12,000

The goods were received in December 28, 2009. What is the total cost that Branigan
Company should charge to inventory?
a.1,050,000 c.1,055,000
b.1,030,000 d.1,067,000

Solution: Answer- c
Purchase price 1,000,000
Normal freight charge 30,000
Handling cost 20,000
Insurance on shipment ___5,000
Total cost of inventory 1,055,000

The abnormal freight charge should be charged to expense.

10.An analysis of ending inventory of lilac company on December 31, 2009 disclosed the
inclusion of the following items:

Merchandise in transit purchased on terms:

FOB shipping point 165,000
FOB destination 100,000
Merchandise out on consignment at sales price(including
mark-up of 30% on cost) 195,000
Merchandise sent to customer for approval (cost of goods sold, P30,000) 40,000
Merchandise held on consignment 35,000

The inventory at December 31, 2009 should be reduced by:

a.355,000 c.203,000
b.190,000 d.222,000

Solution: Answer- b
Merchandise in transit purchased FOB destination 100,000
Mark-up on goods out on consignment(195,000-150,000) 45,000
Mark-up on merchandise for approval 10,000
Merchandise held on consignment __35,000
Total reduction 190,000

11.Stone company had the following consignment transactions during December 2009:
Inventory shipped on consignment to Beta Company 1,800,000
Freight paid by stone 90,000
Inventory received on consignment from Alpha Company 1,200,000
Freight paid by Alpha 50,000

No sales of consigned goods were made through December 31, 2009. Stone's
December 31, Statement of Financial Position should include consigned inventory at:
a.1,200,000 c.1,800,000
b.1,250,000 d.1,890,000
Solution: Answer- d
Inventory shipped on consignment Beta 1,800,000
Freight paid by Stone __90,000
Total cost of consigned inventory 1,890,000

12. Only the inventory sent out on consignment plus the corresponding freight charge
should be included in the inventory of the consignor.

The following information applied to Fenn Company for the current year:
Merchandise purchased for resale 4,000,000
Freight in 100,000
Freight out 50,000
Purchase returns 20,000
Interest on inventory loan 200,000

Fenn's inventoriable cost was:

a.4,280,000 c.4,080,000
b.4,030,000 d.4,130,000

Solution:Answer- c
Merchandise purchased 4,000,000
Freight in __100,000
Total 4,100,000
Purchase returns (__20,000)
Inventoriable cost 4,080,000

13.On August 1 of the current year, Stella 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 purchased was remitted on August 16. The payment due on the P1,000,000
purchased was remitted on August 31. Under the net method and the 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

Solutiuon: Answer- c
Net Method
Purchases(800,000+1,000,000) 1,800,000
Purchase discount taken(2% x 800,000) ( 16,000)
Purchase discount not taken(2% x 1,000,000) ( __20,000)
Net amount 1,764,000

Under the net method, the purchase discount is deducted from purchases regardless of
whether taken or not taken.
 Gross Method
Purchases 1,800,000
Purchase discount taken ( __16,000)
Net purchases 1,784,000
Under the gross method, the purchases are recorded at gross and only the purchase
discount taken is deducted from purchases in determining cost of goods available for
sale.

BIOLOGICAL ASSETS

1. Forester Company on adoption of PAS 41 reclassified certain assets as biological

assets. The total value of the forest assets is P6,000,000 which comprises:

Freestanding trees 5,100,000

Land under trees 600,000
Roads in forests 300,000
6,000,000

In Forester Company's statement of financial position, how much of the forest assets
shall be classified as biological assets?

a. 5,100,000 c. 5,400,000
b. 5,700,000 d. 6,000,000

Solution: Answer- a
Only the freestanding trees shall be classified as biological assets. The land under
trees and roads in forests shall be included in property, plant and equipment.

2. Colombia Company is a producer of coffee. The entity is considering the valuation of

its harvested coffee beans. Industry practice is to value the coffee beans at market value
and users as reference a local publication “Accounting for Successful Farms.”

On December 31, 2009, the entity has harvested coffee beans costing P3,000,000 and
with fair value less cost to sell of P3,500,000 at the point harvest.

Because if long aging and maturation process after harvest, the haevested coffee beans
were still on hand on December 31, 2010. On such date, the fair value less cost to sell is
P3, 900,000 and the net realizable value is P3,200,000.

The coffee beans inventory shall be measured at:

a. 3,000,000 c. 3, 200,000
b. 3,500,000 d. 3,900,000
Solution: Answer- c
Fair value measurement stops at the point of harvest and PAS 2 on inventory
applies after such date. Accordingly, the coffee beans inventory shall be measured at the
lower of cost and net realizable value on December 31,2010.

The fair value less cost to sell of P3,500,000 at the point of harvest is the initial cost
coffee beans inventory for purposes of applying PAS 2. The net realizable value of
P3,200,000 is the measurement on December 31, 2010 because this is lower than the
deemed cost of P3,500,000.

3. Joan Company provided the following data:

Value of biological asset at acquisition cost on December 31 600,000

Fair valuation surplus on initial recognition at fair value on December 31, 2009 700,000

Change in fair value to December 31, 2010 due to growth and price fluctuation 100,000
Decrease in fair value due to harvest 90,000

What is the carrying amount of the biological asset on December 32, 2010?
a. 1,400,000 c. 1,300,000
b. 1,310,000 d. 1,490,000

Solution: Answer- b
Acquisition cost 600,000
Increase in fair value on initial recognition 700,000
Change in fair value in 2010 100,000
Decrease in fair value due to harvest (90,000)
Carrying amount 1,310,000

4. Honey Company has a herd of 10 2-year old animals on January 1, 2009. One animal
aged 2.5 years was purchased on July 1, 2009 for P108, and one animal was born on
July 1, 2009. No animals were sold or disposed of during the year. The fair value less cost
to sell per unit is as follows:

2- year old animal on January 1 100

2.5- year old animal on July 1 108
New born animal on July 1 70
2- year old animal on December 31 105
2.5- year old animal on December 31 111
Newborn animal on December 31 72
3- year old animal on December 31 120
0.5- year old animal on December 31 80
What is the fair value of the biological assets n December 31, 2009?

a. 1,400 c. 1,440
b. 1,320 d. 1360

Solution: Answer- a
Fair value of 3-year old animals on December 31(11 x P120) 1,320
Fair value of 0.5-year old animal on December 31, the newborn (1 x P80) 80
Total fair value -December 31, 2009 1,400

5. Farmland Company produces milk on its farms. The entity produces 20% of the
community's milk that is consumed. Farmland Company owns 5 farms and had a stock of
2,100 cows and 1,050 heifers.

The farms produce 800,000 kilograms of milk a year and the average inventory held is
15,000 kilograms of mlik. However, on December 31, 2009, the entity is currently
holding 50,000 kilograms of milk in powder. On December 31, 2009, the herds are:

Purchased in or before January 1, 2009 cows(3 years old) 2,100

Purchased on January 1, 2009 (2 years old) 300 heifers
Purchased on July 1, 2009 heifers(1.5 years old) 750

No animals were born or sold during the current year. The unit fair value less cost to sell
is as follows:

December 31, 2009:

1-year old 320
2-year old 4,500
1.5-year old 3,600
3-year old 5,000

July 1, 2009:
1-year old 3,000

January 1, 2009:
1-year old 3,000
2-year old 4,000

What is the fair value of bilogical assets on January 1, 2009?

a.9,300,000 c.8,400,000
b.9,600,000 d.7,200,000

Solution: Answer- a
Cows (2,100 x 4,000) 8,400,000
Heifers purchased on 1/1/2009 (300 x 3,000) 900,000
Total fair value-1/1/2009 9,300,000
6. Dairy Company provided the following balances for the year ended December 31,
2009:

Cash 500,000
Trade and other receivables 1,500,000
Inventories 100,000
Dairy livestock- immature 50,000
Dairy livestock- mature 400,000
Property, plant and equipment, net 1,400,000
Trade and other payables 520,000
Note payable- long term 1,500,000
Share capital 1,000,000
Retained earnings- January 1 800,000
Fair value of milk produced 600,000
Gain from change in fair value 50,000
Inventories used 140,000
Staff costs 120,000
Depreciation expense 15,000
Other operating expenses 190,000
Income tax expense 55,000

What is the net income for 2009?

a.650,000 c.130,000
b.600,000 d185,000

Solution: Answer- c
Fair value of milk produced 600,000
Gain from change in fair value 50,000
Total income 650,000
Inventories used (140,000)
Staff costs (120,000)
Depreciation expense 15,000
Other opoerating expenses (190,000)
Income before income tax 215,000
Income tax expense __(85,000)
Net income 130,000

7.Columbia company is a producer of coffee. The entity is considering the measurement

of its harvested coffee beans. Industry practice is to measure the coffee beans at market
value and uses as reference a local publication “Accounting for Successful Farms”.

On December 31, 2010, the entity has harvested coffee beans costing P3,000,000 and
with fair value less cost to sell of P3,500,000 at the point of harvest.

Because of long aging and maturation process after harvest, the harvested coffee beans
were still on hand on December 31, 2011. On such date, the fair value less cost to sell is
P3,900,000 and the net realizable value is P3,200,000.
What is the measurement of the coffee beans inventory as December 31, 2011?
a.3,000,000 c.3,200,000
b.3,500,000 d.3,900,000

Solution: Answer- c
Fair value stops at the point of harvest and PAS 2 on inventory apply on such date.
Then, coffee beans inventory shall be measured at the lower of cost and net realizable
value on December 31, 2010 which is P3,200,000.