MOCK EXAM (3rd) FOR BA 114.1 – FINANCIAL ACCOUNTING & REPORTING A.Y.

21-22

THEORY: (1-10, TF ; 11-30, MC)

1. A required disclosure with regard to inventory is the amount of writedown for the year

2. A loss on purchase commitment should be recorded when the contract price is greater than the
market and it is anticipated that a loss will occur when the contract is completed

3. Cost to store an inventory, such as warehousing cost, should form part of the cost of an inventory

4. The same cost formula should be used for all inventories with similar characteristics as to their
nature and use to the entity

5. For items that are not interchangeable, the standard allows the use of weighted average method of
computing cost of inventory

6. Agricultural products should be measured using the LCNRV method

7. The use of purchase discount account implies that the recorded cost of a purchase is invoice price
plus purchase discount lost

8. Maritime fishery is an agricultural activity which is scoped in in IAS 41

9. When fair value cannot be determined reliably, the biological asset is measured at nominal amount

10. A pharmaceutical entity which grows a plant (e.g., lagundi) may be considered as an agricultural
activity

11. An entity sold merchandise with a list price of P5,000 on account. The entity granted trade
discounts of 30% and 20%. How would you account for the trade discounts?
a. Reduction in the cost of inventory sold
b. Reduction to sales by debiting a contra-revenue account
c. Reduction to amount collectible from customer
d. Reduction to cash collection upon sale

12. Which of the following is not true about accounting for inventory under IFRS?
a. FIFO is allowed.
b. LIFO is not allowed
c. The weighted-average method is acceptable.
d. Inventories are always valued at net realizable value.

13. Which of the following costs is least likely to be included by an entity as inventory?
a. Storage costs for the chocolate liquor.
b. Excise taxes paid to the government for the import of the cacao beans.
c. Storage costs for chocolate and purchased finished goods awaiting shipment to customers.
d. Salary of procurement manager in charge for the purchase of the cacao beans.

14. Valuation of inventories requires the determination of all of the following except:
a. The costs to be included in inventory.

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MOCK EXAM (3rd) FOR BA 114.1 – FINANCIAL ACCOUNTING & REPORTING A.Y. 21-22

b. The physical goods to be included in inventory.

c. The cost of goods held on consignment from other companies.
d. The cost flow assumption to be adopted.

15. If a unit of inventory has declined in value below original cost, but the market value exceeds net
realizable value, the amount to be used for purposes of inventory valuation is
a. net realizable value c. market value
b. original cost d. net realizable value less a normal profit margin

16. I. The allowance method of inventory writedown conforms to the conservatism principle
II. Physical count of inventory applies to both perpetual and periodic inventory systems
III. Recognition of cost of goods sold is an application of the matching principle
IV. The gross profit method of inventory estimation uses historical sales margins to estimate the
cost of inventory
Pick the best choice:
a. One of the statements is true c. Three of the statements are true
b. Two of the statements are true d. All of the statements are true

17. Under the perpetual system of inventory, if an entity issues a credit memorandum, in which
transaction will it debit merchandise inventory?
a. Sales returns c. Sales discounts
b. Sales allowance d. All of the above

18. Which of the items listed below are comprised in determining the cost of inventories according to
IAS 2?
a. General administrative overheads, trade discounts, and recoverable purchase taxes
b. Variable production overheads, fixed production overheads, and general administrative
overheads
c. Transportation on purchased goods, variable production overheads, and fixed production
overheads
d. Storage costs of partially finished goods, storage costs of finished goods, and wasted
material due to a machine breakdown

19. Inventory cost does not include

a. Purchase price c. Import duties
b. Rebates d. Freight

20. An exception to the general rule that costs should be charged to expense in the period incurred is
a. Factory overhead costs incurred on a product manufactured but not sold during the current
period.
b. Interest cost for financing of inventories that are routinely manufactured.
c. General and administrative fixed cost incurred in connection with the purchase of inventory.
d. Sales commission and salary incurred in connection with the sale of inventory.

21. Which statement is false regarding inventory writedown and reversal of writedown?
a. Reversal of inventory writedown is not prohibited.
b. Separate reporting of reversal of inventory writedown is not required.

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MOCK EXAM (3rd) FOR BA 114.1 – FINANCIAL ACCOUNTING & REPORTING A.Y. 21-22

c. An entity is not required to record an inventory writedown in a separate loss account.

d. All of the choices are false.

22. The credit balance that arises when a loss on a purchase commitment is recognized should be
a. Presented as a current liability
b. Subtracted from ending inventory
c. Presented as an appropriation of retained earnings
d. Presented in the income statement

23. Bearer animals shall be accounted for as

a. Biological assets
b. Property, plant, and equipment
c. Investment property
d. Agricultural produce

24. IAS 41 specifically requires that agricultural produce should be subsequently measured in
accordance with
a. IAS 16 b. IFRS 5 c. IAS 41 d. IAS 2

25. Biological assets include the following except:

a. 10-year old sheep (lifespan is maximum of 12 years)
b. Unborn pigs
c. Unharvested grapes from the vine
d. All are biological assets

26. How should an entity account for the harvested wheat in its warehouse?
a. These should be accounted for as bearer plants under IAS 16
b. These should be accounted for as inventory under IAS 2
c. These should be accounted for as biological asset under IAS 41
d. These should be accounted for as agricultural produce under IAS 41

27. Variable production overheads are allocated to each unit of production on the basis of
a. Normal capacity of the production facilities
b. Actual use of the production facilities
c. Either the normal capacity or the actual use of production facilities, whichever is appropriate
d. Neither the normal capacity nor the actual use of production facilities

28. Which statement is true about the LCNRV method of measuring inventory?
a. The LCNRV is always either the net realizable value or cost
b. The LCNRV gives the lowest valuation if applied to individual items of inventory
c. When the cost of goods sold method is used to record inventory at net realizable value, the
NRV is substituted for cost and the loss is buried in the cost of goods sold
d. All of these statements are true about LCNRV method

29. Biological assets

a. Are found only in Biotech entities
b. Are living animals or living plants and must be disclosed as a separate line item in the SFP

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MOCK EXAM (3rd) FOR BA 114.1 – FINANCIAL ACCOUNTING & REPORTING A.Y. 21-22

c. Must be valued at cost

d. Do not generally have future economic benefits

30. Which is accepted in determining bad debt expense?

a. A percentage of sales adjusted for the balance in the allowance
b. A percentage of sales not adjusted for the balance in the allowance
c. A percentage of accounts receivable not adjusted for the balance in the allowance
d. An amount derived from aging accounts receivable and not adjusted for the allowance

PROBLEM-SOLVING

1. Sasori Company included the following items in its inventory on December 31, 2018:
• Merchandise out on consignment to Father Company at sales price – P3,000,000
• Goods purchased in transit, FOB shipping point – P2,000,000
• Goods sold in transit, FOB shipping point, at sales price – P4,500,000
• Goods held on consignment from Mother Company – P1,000,000
• Freight paid by Sasori on consigned goods to Father – P100,000
• Freight paid by Mother Company – P50,000
• Freight paid by Sasori on goods purchased – P10,000
• Freight paid Sasori on goods sold – P20,000
• Mark-up on cost is 25%. Consigned goods were still unsold at December 31, 2018

How much should be included in Sasori Company’s inventory on December 31, 2018?
a. 5,010,000 b. 4,510,000 c. 4,410,000 d. 5,000,000

2. The inventory and related records of Nidoran Company indicate the following information:
Merchandise inventory, Jan. 2018 P 450,000
Purchases for the year 2018 3,150,000
Sales for the year 2018 4,000,000
The physical inventory on December 31, 2018 was determined at P750,000 in the company’s
warehouse. Nidoran’s gross profit on sales has remained constant at 30%. The company’s president
suspects some of the merchandise may have been pilfered by some new employees.

At December 31, 2018, what is the estimated cost of missing inventory

a. P 50,000 b. P100,000 c. P108,000 d. P120,000

3. Poliwag Co.’s usual terms are net 60 days, FOB shipping point. Sales, net of returns and allowances,
totaled P2.3M for the year ended December 31, 2018, before year-end adjustments.

Additional data are as follows:

• On December 27, 2018, Poliwag authorized a customer to return, for full credit, good
shipped and billed at P50,000 on December 15, 2018. The returned goods were received
by Poliwag on January 4, 2019, and a P50,000 credit memo was issued and recorded on
the same date.

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MOCK EXAM (3rd) FOR BA 114.1 – FINANCIAL ACCOUNTING & REPORTING A.Y. 21-22

• Goods with an invoice amount of P80,000 were billed and recorded on January 3, 2019.
The goods were shipped on December 30, 2018.
• Goods with an invoice amount of P100,000 were billed and recorded on December 30,
2018. The goods were shipped on January 3, 2019.

The adjusted net sales for 2018 were

a. a. P2.3M b. P2.25M c. P2.23M d. P2.07M

4. The Sana All Merchandising Company is a leading distributor of tupperwares. The company uses the
first-in, first-out method of calculating the cost of goods sold. The following information concerning
two of the company’s products is taken from the month of May:
RED BLUE
No. of units Unit cost No. of units Unit cost
May 1, Beg. inventory 10,000 P 60 6,000 P 40
Purchases:
May 15 14,000 65 9,000 42
May 25 6,000 75
Sales for the month 20,000 (at P80) 10,000 (at P44)

On May 31, Sana All’s suppliers reduced their price from the last purchase price by the following
percentages:
Red – 25% Blue – 20%

Accordingly, the company agreed to reduce selling prices by 15% on all items beginning next month.
Sana All Merchandising Company’s selling costs are calculated at 10% of selling price. Both products
have a normal profit of 30% on sales prices (after selling costs).

Total cost of Red as of May 31 is

a. P710,000 c. P600,000
b. P653,300 d. P612,000

5. Refer to #4. Total cost of Blue as of May 31 is

a. P210,000 c. P200,000
b. P206,000 d. P168,300

6. Refer to #4. The inventory at May 31 should be valued at

a. P768,300 c. P920,000
b. P780,300 d. P890,000

7. Refer to #4. The loss on inventory write down for the month of May is
a. P139,700 c. P29,300
b. P137,300 d. P27,600

8. Refer to #4. The cost of sales, before loss on inventory write down, for the month of May is
a. P1,778,000 c. P1,797,700
b. P1,685,600 d. P1,658,000

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MOCK EXAM (3rd) FOR BA 114.1 – FINANCIAL ACCOUNTING & REPORTING A.Y. 21-22

9. Clefairy Company, a clothing store, uses the retail inventory method. The following relates to 2018
operations.
Inventory, 1/1/18, at cost P 142,000
Inventory, 1/1/18, at sales price 204,000
Purchases at cost 313,000
Purchases at sales price 520,000
Additional mark-up on normal sales price 20,000
Sales (including P80,000 of items which were
marked down from P124,000) 620,000
Rounding the cost ratio to two decimal places, the cost of the December 31, 2018 inventory
determined by the retail inventory method is:
a. P 48,800 b. P 50,400 c. P 52,000 d. P 80,000

10. On September 30, 2018, Slowpoke’s closing inventory was counted and valued at its cost of P1M.
Some items of inventory which had cost P210,000 had been damaged in a flood on September 15,
2018 and are not expected to achieve their normal selling price, which is calculated to achieve a
gross profit margin of 30%. The sale of these goods will be handled by an agent who sells them at
80% of the normal selling price and charges Slowpoke a commission of 25%. At what value will the
closing inventory of Slowpoke be reported in its SFP as at September 30, 2018?
a. 1,000,000 b. 970,000 c. 790,000 d. 180,000

11. Slyduck Company was in the process of relocating its plant, which resulted in some confusion
relating to inventory cutoff, as indicated by the following:
• Goods on hand costing P17,940 was included in the inventory although the purchase invoice
was not recorded until next year
• Goods shipped on Jan 1, 2019 was included in the inventory. The cost of this merchandise
was P22,190, and the sales was recorded as P31,380 on Dec 31, 2019.
• Goods costing P12,150 was included in the inventory although it was shipped to a customer
on Dec 31, 2019, FOB shipping point. The company recorded the sale of P19,246 on that
date.
• Merchandise costing P18,200 was not counted.
• Goods in transit (shipped to Slyduck FOB Destination) was recorded as a purchase as of Dec
2, 2019, and its cost of P17,287 was not included in the Dec 31, 2019 inventory.

By how much was the net income of Slyduck Company for the year ended overstated or
understated?
a. 7,390 overstated c. 60,557 overstated
b. 43,270 overstated d. 61,740 overstated

Situation 1 – During 2018, Deidara Company signed a noncancellable contract to purchase 500
sacks of rice at P900 per sack with delivery to be made in 2019. On December 31, 2018, the price
of rice had fallen to P850 per sack. On May 9, 2019, Deidara Company accepts delivery of rice when
the price is P910 per sack.

Situation 2 – Kakuzu Company provided the following assets:

• Land related to agricultural activities – P3,000,000
• Plants with singular purpose – P600,000

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MOCK EXAM (3rd) FOR BA 114.1 – FINANCIAL ACCOUNTING & REPORTING A.Y. 21-22

• Animals related to recreational activities – P400,000

• Cattle – P200,000
• Cheese – P20,000
• Other bearer animals – P500,000
• Plants with dual purpose – P250,000
• Picked grapes – P80,000
• Eggs – P30,000

Situation 3 – Hidan Company has the following data related to an item of inventory:
Inventory, May 1 1,000 units @ P4.20
Purchase, May 7 3,500 units @ P4.40
Purchase, May 16 700 units @ P4.50
Inventory, May 31 1,300 units

12. What amount of loss on purchase commitment should Deidara Company recognize in its 2018
income statement?
a. 15,000 b. 10,000 c. 25,000 d. 0

13. What amount of recovery of loss on purchase commitment should Deidara Company recognize in
its 2019 income statement?
a. 0 b. 30,000 c. 5,000 d. 25,000

14. What amount of biological assets should Kakuzu Company recognize in its balance sheet?
a. 700,000 b. 950,000 c. 1,300,000 d. 1,350,000

15. How much is Hidan Company’s cost of goods sold for May using average-cost?
a. 16,900 b. 16,961 c. 17,062 d. 17,500

16. Yong San Company is engaged in raising poultry. Information regarding its activities is as follows:
Carrying amount on January 1, 2017 – P500,000
Increase due to purchases – P200,000
Gain arising from change in FV less cost to sell – due to price change – P40,000
Gain arising from change in FV less cost to sell – due to physical change – P60,000
Decrease due to sales – P85,000
Decrease due to harvest – P20,000

What amount of biological asset should Yong san Company report on December 31, 2017
a. 495,000 b. 515,000 c. 695,000 d. 715,000

17. Refer to #16. What amount of gain/loss should Yong san Company recognize for 2017?
a. 15,000 b. 80,000 c. 100,000 d. 195,000

18. An entity included the following items in inventory at year-end:

Goods out on consignment at sales price, including
40% markup on cost 1,400,000
Goods purchased in transit, shipped FOB destination 1,200,000
Goods held on consignment by the entity 900,000

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MOCK EXAM (3rd) FOR BA 114.1 – FINANCIAL ACCOUNTING & REPORTING A.Y. 21-22

At what amount should the inventory at year-end be reduced?

a. 1,460,000 b. 2,660,000 c. 1,300,000 d. 2,500,000

19. Rodney Company reported during the current year beginning inventory worth P500,000, purchases
of P2,500,000, and net sales of P3,200,000. A physical count at year-end resulted in an inventory
of P575,000. The gross profit in sales had remained constant at 25%. The entity suspected that
some inventory may have been taken by a new employee. What is the estimated cost of missing
inventory at year-end?
a. 100,000 b. 175,000 c. 225,000 d. 25,000

20. Josephine Company provided the following assets in a forest plantation and farm:
Freestanding trees 5,000,000
Land under the trees 600,000
Roads in forests 300,000
Animals related to recreational activities 1,000,000
Bearer plants 1,500,000
Bearer animals 2,000,000

PROBLEM

The Reten Company is an importer and wholesaler. Its merchandise is purchased from a
number of suppliers and is warehoused until sold to consumers. In conducting the audit for
the year ended December 31, 2019, the company’s CPA determined that the system of
internal control was good. Accordingly, he observed the physical inventory at an interim
date, November 30, 2019, instead of at year-end.

The following information was obtained from the general ledger:

• Inventory, January 1, 2019 P 90,000
• Inventory, November 30, 2019 225,000
• Sales for 11 months ended November 30, 2019 800,000
• Sales for the year ended December 31, 2019 950,000
• Purchases for 11 months ended November 30, 2019
(before audit adjustments) 720,000
• Purchases for the year ended December 31, 2019
(before audit adjustments) 810,000

Additional information is as follows:

• Goods received on November 28 but recorded as purchases in December – 10,000
• Deposits made in October 2019 for purchases to be made in 2020 but charged to
Purchases – 14,000
• Defective merchandise returned to suppliers:
Total at November 30, 2019 – 5,000
Total at December 31, 2019, excluding November items – 7,000

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MOCK EXAM (3rd) FOR BA 114.1 – FINANCIAL ACCOUNTING & REPORTING A.Y. 21-22

The returns have not been recorded pending receipt of credit memos from the
suppliers. The defective goods were not included in the inventory.

• Goods shipped in November under FOB destination and received in December were
recorded as purchases in November – 18,500
• Through the carelessness of the client’s warehouseman, certain goods were
damaged in December and sold in the same month at its cost – 20,000
• Audit of the client’s November inventory summary revealed the following:
Items duplicated 3,000
Purchases in transit:
FOB shipping point 12,000
FOB destination 18,500
Items counted but not included in the inventory summary 7,000
Errors in extension that overvalued the items 4,000

Required:

• The correct amount of net purchases up to November 30, 2019

• The correct amount of net purchases up to December 31, 2019
• The correct inventory on November 30, 2019
• What is the gross income for 11 months ended November 30, 2019?
• What is the estimated inventory on December 31, 2019?

(Sources: RPCPA/AICPA/Various test banks/Various review centers’ materials)