CHAPTER 4

INVENTORIES

PROBLEMS

Discussion Question No. 15 (Hamster Company

Include Exclude
Goods displayed in the store √
Goods stocked in the warehouse, not covered by any sales
contract √
Goods purchased, in transit, shipped FOB seller √
Goods purchased, in transit, shipped FOB destination √
Freight cost on goods received, goods are still unsold √
Goods held on consignment √
Goods out on consignment √
Goods out to customers on approval √
Goods in the hands of traveling salesmen √
Goods sold with a buyback arrangement for the full selling √
price and other costs incurred by the buyer
Unused factory supplies and indirect materials √
Goods which require additional processing √
Direct materials stocked in the warehouse √
Storage costs of goods completed √
Insurance premiums paid on stocked goods √
Goods completed, manufactured to customer’s specification,
awaiting instruction for delivery by the customer √
Freight paid on goods sold √
Unused supplies for administrative purposes √
Unused store supplies √
Goods sold with a right to return granted to buyers, amount of
return is reasonably predictable. √
Goods sold under FAS, at the port designated by the buyer √
Goods at the port, purchased CIF √

PROBLEMS

4-1. (Crossings Company)

Invoice price (150,000 x 0.80 x 0.90) P 108,000

Freight charge 2,500
Total cost of merchandise purchases P 110,500

4-2. (Jane, Inc.)

Reported units on April 30, 2013 10,200

Adjustments:
No. 1 item – Purchased FOB shipping point
still in transit not included in purchases 250
No. 3 item – Sold FOB destination still in transit not
included in inventory 500
Correct inventory quantity 10,950
4-3. (Orient Trading)

Reported inventory P9,500,000

Merchandise in transit purchased FOB destination (420,000)
Goods held on consignment (500,000)
Mark up on goods out on consignment
Sales price 600,000
Cost (600,000÷ 1.5) 400,000 (200,000)
Merchandise in transit to customers FOB destination
400,000 x (100% - 40%) 240,000
Merchandise purchased in transit FAS 150,000
Correct inventory P8,770,000

4-4. (Tintin Company)

Physical inventory at December 31, 2015 P 172,000

Merchandise in transit shipped FOB shipping point 31,500
Merchandise sold FOB destination still in transit 12,500
Correct inventory at December 31, 2015 P 216,000

4-5. (Centerpoint, Inc.)

Reported inventory P 562,500

Adjustments:
a. Goods out on consignment 110,000
b. Goods purchased in transit FOB shipping point 27,000
c. Goods sold in transit FOB shipping point
included in inventory ( 85,000)
d. Goods sold in transit FOB destination
e. not included in inventory 26,000
g. Goods sold in transit FOB destination
not included in inventory 37,000
Correct inventory P 677,500

4-6. (Mega Company)

Cost of EI Cost of Goods Sold Gross Profit
FIFO 3,506 4,550 1,955
Weighted average 3,333 4,726 1,779
Moving average 3,370 4,686 1,819

FIFO
Cost of ending inventory:
275 x 11.75 3,231.25
25 x 11.00 275.00 3,506.25
Cost of goods sold:
Cost of goods available for sale 8,056.25
Less ending inventory 3,506.25 4,550.00
Gross profit:
Sales 6,505.00
Less cost of goods sold 4,550.00 1,955.00

Weighted average
Cost of ending inventory:
Cost of goods available for sale 8,056.25
Number of units available for sale ÷ 725
Weighted average cost per unit 11.11
Units in ending inventory x 300 3,333.00
Cost of goods sold:
Cost of goods available for sale 8,056.25
Less ending inventory 3,330.00 4,726.15

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 Gross profit:
Sales 6,505.00
Less cost of goods sold 4,726.25 1,778.75

Moving average
Cost of ending inventory:
Inventory, January 1 250 x 10.50 = 2,625.00
Purchase, March 7 200 x 11.00 = 2,200.00
Total 450 x 10.72 = 4,825.00
Sale, May 20 (120 x 10.72 = 1,286.40)
Sale, June 30 ( 55 x 10.72 = 589.60)
Balance 275 x 10.72 = 2,949.00
Purchase, July 15 275 x 11.75 = 3,231.25
Total 550 x 11.24 = 6,180.25
Sale, September 17 (250 x 11.24 = 2,810.00)
Balance 300 x 11.24 = 3,370.25

Cost of goods sold:

Cost of goods available for sale 8,056.25
Less ending inventory 3,370.25 4,686.00
Gross profit:
Sales 6,505.00
Less cost of goods sold 4,686.00 1,819.00

4-7. (Landmark Enterprises)

a. Cost of ending inventory
1/1 2,400@ 10.75 25,800
1/5 1,900@ 11.35 21,565
4,300@ 11.02 47,365
1/8 2,200@ 11.02 24,244
2,100@ 11.01 23,121
1/24 3,800@ 11.80 44,840
5,900@ 11.52 67,961
1/30 3,600@ 11.52 41,472
2,300@ 11.52 26,489
b. Cost of goods available for sale (25,800 + 21,565 + 44,840) P92,205
Number of units available for sale (2,400 + 1,900 + 3,800) ÷ 8,100
Weighted average cost per unit P 11,38
Number of units in ending inventory x 2,300
Cost of ending inventory P26,174

4-8. (Rockwell Club, Inc.)

Amount Units
Cost of sales:
Sales (160,500 x 12) 1,926,000
Less gross profit 738,600 P1,187,400 160,500
Add ending inventory
42,000 x 7.40 310,800
3,000 x 7.20 21,600 332,400 45,000
Available for sale P1,519,800 205,500
Deduct purchases 1,150,050 154,500
Inventory, January 1 P 369,750 51,000
Average cost per unit (369,750 ÷ 51,000 units) P 7.25

4-9. (Mazda Corporation)

(a) FIFO 2013 2014 2015
Sales P12,000,000 P18,800,000 P29,400,000
Cost of goods sold 7,000,000 12,760,000 20,250,000
Gross profit P 5,000,000 P 6,040,000 P 9,150,000

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 Cost of goods sold:
2013 10,000 x 700 = 7,000,000
2014 3,000 x 700 = 2,100,000
13,000 x 820 = 10,660,000 12,760,000
2015 5,000 x 820 = 4,100,000
19,000 x 850 = 16,150,000 20,250,000

(b) Weighted average 2013 2014 2015

Sales P12,000,000 P18,800,000 P29,400,000
Cost of goods sold 7,000,000 12,845,760 20,211,360
Gross profit P 5,000,000 P 5,954,240, P 9,188,640

Cost of goods sold:

2013 10,000 x 700 7,000,000
2014 (3,000 x 700) + (18,000 x 820) x 16,000* 12,845,760
21,000
2015 (5,000 x 802.86) + (25,000 x 850) x 24,000* 20,211,360
30,000
*unit costs were rounded off to nearest centavo: 802.86 and 842.14, for
2014 and 2015, respectively.

4-10. (Sta. Lucia Company)

2013 2014 2015
Reported profit under average method P3,600,000 P5,000,000 P7,000,000
Difference in inventory using FIFO
Beginning inventory - ( 40,000) (120,000)
Ending inventory 40,000 120,000 650,000
Profit under FIFO basis P3,640,000 P5,080,000 P7,530,000

4-11. (City Company)

Cost (under FIFO basis) P26,000

Net realizable value (40,000 – 12,000) P28,000
Lower of cost and net realizable value P26,000

4-12. (Rustan’s Trading)

Product Cost NRV Lower Quantity Amount

A 102 105 102 4,000 P408,000
B 45 42 42 6,000 252,000
C 24 22 22 5,500 121,000
D 9 10 9 7,200 64,800
Total P845,800

4-13. Dechavez Company

(a) Direct Method

The profit is computed as follows:
2015 2014
Sales P3,200,000 P2,900,000
Cost of goods sold (1,280,000) (1,020,000)
Gross profit P1,920,000 P1,880,000
Selling expenses (450,000) (330,000)
General and administrative expenses (300,000) (310,000)
Profit P 1,170,000 P 1,240,000
Cost of goods sold:
Beginning inventory P 480,000 P 300,000
Purchases 1,400,000 1,200,000
Total cost of goods available for sale P1,880,000 P 1,500,000
Ending inventory 600,000 480,000
Cost of goods sold P1,280,000 P 1,020,000

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 (b) Allowance method
The profit is computed as follows:
2015 2014
Sales P3,200,000 P2,900,000
Cost of goods sold (1,240,000) (1,080,000)
Gross profit P1,960,000 P1,820,000
Selling expenses (450,000) (330,000
General and administrative expenses (300,000) (310,000)
Decline in NRV (40,000
Gain on adjustment of allowance __________- 60,000
Profit P 1,170,000 P 1,240,000

Cost of goods sold:

Beginning inventory P 500,000 P 380,000
Purchases 1,400,000 1,200,000
Total cost of goods available for sale P1,900,000 P 1,580,000
Ending inventory (660,000) 500,000
Cost of goods sold P1,240,000 P 1,080,000

4-14. (Purple Company)

Cost P200,000
Net realizable value (204,000 – 10,000) 194,000
Loss 6,000

4-15. (Powder Blue Company)

Inventory, January 1 P1,400,000

Purchases during the year 6,600,000
Cost of goods available for sale P8,000,000
Less Inventory, December 31 1,200,000
Cost of goods sold P6,800,000

4-16. (Philam Grocers Company)

(a) Cost of product X and product Y

Product X Product Y
January 1 inventory 2,500 units 1,500 units
Purchases 7,400 units 4,500 units
Sold (7,000 units) (5,000
units)
December 31 inventory 2,900 units 1,000 units
Unit cost (all coming from latest purchase price, as
ending inventory is less than latest purchases) P125 P98
Ending inventory at FIFO cost P362,500 P98,000
(b)
Product X Product Y
Sales price (effective 2014) 90% x previous SP P135.00 P111.60
Estimated selling cost (13.50) (11.16)
Net realizable value P121.50 P100.44
Lower of cost and net realizable value, per unit P121.50 P98
Number of units in ending inventory 2,900 units 1,000 units
Inventory value at lower of cost and NRV P352,350 P98,000
Total inventory value at December 31, 2015 352,350+98,000 = P450,350

(c) Cost of goods sold in the statement of comprehensive income

Product X Product Y Total
Inventory Jan. 1 P300,000 P135,000 P435,000
Purchases 916,600 432,500 1,349,100
Goods available for sale P1,216,600 P567,500 P1,784,100
Ending inventory at cost 362,500 98,000 460,500

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 Cost of goods sold P1,323,600
(d) Inventory at cost P460,500
Inventory at lower of cost and NRV 450,350
Required allowance P 10,150
Existing allowance 15,000
Gain on adjustment of allowance P 4,850

(e) Inventory 460,500

Income Summary 460,500

(or using the cost of goods sold method)

Inventory, December 31 460,500
Cost of goods sold 1,323,600
Purchases 1,349,100
Inventory, January 1 435,000

Allowance to Reduce Inventory to NRV 4,850

Gain on Adjustment of Allowance to Reduce Inventory to NRV 4,850

MULTIPLE CHOICE QUESTIONS

Theory

MC1 B MC6 A MC11 C MC16 A

MC2 A MC7 A MC12 A MC17 D
MC3 D MC8 D MC13 A MC18 D
MC4 B MC9 A MC14 C MC19 C
MC5 D MC10 A MC15 D MC20 D
MC21 D

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