CHAPTER 4

INVENTORIES
PROBLEMS
4-1.

(Hamster Company)
Include
Goods displayed in the store

Goods stocked in the warehouse, not covered by any

sales contract

Goods purchased, in transit, shipped FOB seller

Exclude

Goods purchased, in transit, shipped FOB

destination
Freight cost on goods received, goods are still
unsold

Goods held on consignment

4-2.

4-3.

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 customers

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.

(Crossings Company)
Invoice price (150,000 x 0.80 x 0.90)
Freight charge
Total cost of merchandise purchases
(Jane, Inc.)
Reported units on April 30, 2013
Adjustments:
No. 1 item Purchased FOB shipping point

P 108,000
2,500
P 110,500

10,200

Chapter 4 - Inventories

4-4.

4-5.

4-6.

4-7.

still in transit not included in purchases

No. 3 item Sold FOB destination still in transit not
included in inventory
Correct inventory quantity
(Orient Trading)
Reported inventory
Merchandise in transit purchased FOB destination
Goods held on consignment
Mark up on goods out on consignment
Sales price
600,000
Cost (600,000 1.5)
400,000
Merchandise in transit to customers FOB destination
400,000 x (100% - 40%)
Correct inventory
(Tintin Company)
Physical inventory at December 31, 2013
Merchandise in transit shipped FOB shipping point
Merchandise sold FOB destination still in transit
Correct inventory at December 31, 2013

250
500
10,950
P9,500,000
(420,000)
(500,000)

(200,000)
240,000
P8,620,000

P 172,000
31,500
12,500
P 216,000

(Centerpoint, Inc.)
Reported inventory
Adjustments:
a.
Goods out on consignment
b.
Goods purchased in transit FOB shipping point
c.
Goods sold in transit FOB shipping point
included in inventory
d.
Goods sold in transit FOB destination
not included in inventory
g.
Goods sold in transit FOB destination
not included in inventory
Correct inventory

P 562,500
110,000
27,000
(85,000)
26,000
37,000
P 677,500

(Mega Company)

FIFO
Weighted average
Moving average
FIFO

Cost of Ending
Inventory
3,506
3,333
3,370

Cost of Goods Sold

4,550
4,726
4,686

Gross Profit
1,955
1,779
1,819

Cost of ending inventory:

275 x 11.75
25 x 11.00

3,231.25
275.00

3,506.25

Cost of goods sold:

Cost of goods available for sale
Less ending inventory

8,056.25
3,506.25

4,550.00

Gross profit:
Sales
Less cost of goods sold

6,505.00
4,550.00

1,955.00

27

Chapter 4 - Inventories

Weighted average
Cost of ending inventory:
Cost of goods available for sale
Number of units available for sale
Weighted average cost per unit
Units in ending inventory

8,056.25
725
11.11
x 300

3,333.00

Cost of goods sold:

Cost of goods available for sale
Less ending inventory

8,056.25
3,330.00

4,726.15

Gross profit:
Sales
Less cost of goods sold

6,505.00
4,726.25

1,778.75

Moving average
Cost of ending inventory:
Inventory, January 1
Purchase, March 7
Total
Sale, May 20
Sale, June 30
Balance
Purchase, July 15
Total
Sale, September 17
Balance

4-8.

250 x 10.50 = 2,625.00

200 x 11.00 = 2,200.00
450 x 10.72 = 4,825.00
(120 x 10.72 = 1,286.40)
( 55 x 10.72 = 589.60)
275 x 10.72 = 2,949.00
275 x 11.75 = 3,231.25
550 x 11.24 = 6,180.25
(250 x 11.24 = 2,810.00)
300 x 11.24 =

3,370.25

Cost of goods sold:

Cost of goods available for sale
Less ending inventory

8,056.25
3,370.25

4,686.00

Gross profit:
Sales
Less cost of goods sold

6,505.00
4,686.00

1,819.00

(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)

Number of units available for sale (2,400 + 1,900 + 3,800)
Weighted average cost per unit
Number of units in ending inventory

28

P92,205
8,100
P 11,38
x 2,300

Chapter 4 - Inventories
Cost of ending inventory
4-9.

P26,174

(Rockwell Club, Inc.)

Cost of sales:
Sales (160,500 x 12)
1,926,000
Less gross profit
738,600
Add ending inventory
42,000 x 7.40
310,800
3,000 x 7.20
21,600
Available for sale
Deduct purchases
Inventory, January 1
Average cost per unit (369,750 51,000 units)

4-10.

4-12.

4-13.

Units

P1,187,400

160,500

332,400
P1,519,800
1,150,050
P 369,750

45,000
205,500
154,500
51,000
P 7.25

(Sta. Lucia Company)

Reported profit under average method
Difference in inventory using FIFO
Beginning inventory
Ending inventory
Profit under FIFO basis

4-11.

Amount

2011
P3,600,000

2012
P5,000,000

2013
P7,000,000

40,000
P3,640,000

(120,000)
650,000
P7,530,000

40,000)
120,000
P5,080,000

(City Company)
Cost (under FIFO basis)
Net realizable value (40,000 12,000)
Lower of cost and net realizable value
(Rustans Trading)
Product
A
B
C
D
Total

Cost
102
45
24
9

P26,000
P28,000
P26,000

NRV
105
42
22
10

Lower
102
42
22
9

Quantity
4,000
6,000
5,500
7,200

Amount
P408,000
252,000
121,000
64,800
P845,800

Dechavez Company
(a) Direct Method
The profit is computed as follows:
2013
P3,200,000
(1,280,000)
P1,920,000
(450,000)
(300,000)

Sales
Cost of goods sold
Gross profit
Selling expenses
General and administrative expenses

29

2012
P2,900,000
(1,020,000)
P1,880,000
(330,000)
(310,000)

Chapter 4 - Inventories
Profit

P 1,170,000

Cost of goods sold:

Beginning inventory
Purchases
Total cost of goods available for sale
Ending inventory
Cost of goods sold

P 480,000
1,400,000
P1,880,000
600,000
P1,280,000

P 1,240,000

300,000
1,200,000
P 1,500,000
480,000
P 1,020,000

(b) Allowance method

The profit is computed as follows:
2013
P3,200,000
(1,240,000)
P1,960,000
(450,000)
(300,000)
(40,000
__________P 1,170,000

Sales
Cost of goods sold
Gross profit
Selling expenses
General and administrative expenses
Decline in NRV
Gain on adjustment of allowance
Profit
Cost of goods sold:
Beginning inventory
Purchases
Total cost of goods available for sale
Ending inventory
Cost of goods sold

4-14.

4-15.

4-16.

P 500,000
1,400,000
P1,900,000
(660,000)
P1,240,000

2012
P2,900,000
(1,080,000)
P1,820,000
(330,000
(310,000)
60,000
P 1,240,000

380,000
1,200,000
P 1,580,000
500,000
P 1,080,000

(Purple Company)
Cost
Net realizable value (204,000 10,000)
Loss

P200,000
194,000
6,000

(Powder Blue Company)

Inventory, January 1
Purchases during the year
Cost of goods available for sale
Less Inventory, December 31
Cost of goods sold

P1,400,000
6,600,000
P8,000,000
1,200,000
P6,800,000

(Philam Grocers Company)

(a) Cost of product X and product Y
January 1 inventory
Purchases
Sold
December 31 inventory
Unit cost (all coming from latest purchase price, as
ending inventory is less than number in latest
purchases)

30

Product X
2,500 units
7,400 units
(7,000 units)
2,900 units

Product Y
1,500 units
4,500 units
(5,000 units)
1,000 units

P125

P98

Chapter 4 - Inventories
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, 2013 352,350+98,000 = P450,350
(c) Cost of goods sold in the statement of comprehensive income
Product X
Product Y
Inventory Jan. 1
P300,000
P135,000
Purchases
916,600
432,500
Goods available for sale
P1,216,600
P567,500
Ending inventory at cost
362,500
98,000
Cost of goods sold
(d)

Inventory at cost
Inventory at lower of cost and NRV
Required allowance
Existing allowance
Gain on adjustment of allowance

(e)

Inventory
Income Summary

Total
P435,000
1,349,100
P1,784,100
460,500
P1,323,600

P460,500
450,350
P 10,150
15,000
P 4,850
460,500
460,500

(or using the cost of goods sold method)

Inventory, December 31
Cost of goods sold
Purchases
Inventory, January 1

460,500
1,323,600
1,349,100
435,000

Allowance to Reduce Inventory to NRV

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

4-17.

(DEC Company)
(a)
Gross profit is 40% based on sales
Merchandise inventory, January 1, 2013
Purchases for the year
Cost of goods available for sale
Less estimated cost of goods sold (4,200,000 x 60%)
Estimated cost of ending inventory
Physical inventory on December 31, 2013
Estimated cost of the missing inventory
(b)

4,850

P 450,000
3,150,000
P3,600,000
2,520,000
P 1,080,000
500,000
P 580,000

Gross profit is 40% based on cost of sales

Merchandise inventory, January 1, 2013
Purchases for the year

31

P 450,000
3,150,000

Chapter 4 - Inventories
Cost of goods available for sale
Less estimated cost of goods sold (4,200,000/1.40)
Estimated cost of ending inventory
Physical inventory on December 31, 2013
Estimated cost of the missing inventory

P3,600,000
3,000,000
P 600,000
500,000
P 100,000

4-18.
Estimated cost of goods sold (705,000 18,000)/ 1.20
Add Inventory at July 20, 2013
Cost of goods available for sale
Less net purchases for the period (650,000 12,000 + 6,000)
Estimated cost of June 30, 2013 inventory
4-19.

4-20.

4-21.

(Manels Company)
Merchandise inventory, January 1
Purchases (1,000,000 + 40,000 60,000)
Available for sale
Estimated cost of goods sold (3,200,000 x 70%)
Estimated ending inventory
Less goods undamaged located in showroom (200,000 + 80,000)
Estimated cost of merchandise destroyed by the flood
(Old Rose Company)
Inventory, January 1, 2013
Purchases
Freight in
Cost of goods available for sale
Estimated cost of goods sold (2,200,000 50,000) x 70%
Estimated cost of ending inventory
Inventory per actual count
Shortage in inventory
(Blazing Red Company)
Inventory, January 1, 2012
Purchases:
Payments to suppliers
Accounts Payable, 8/28/12
Accounts Payable, 1/1/12
Cost of goods available for sale
Estimated cost of goods sold:
Collections from customers
Accounts Receivable, 8/28/12
Accounts Receivable, 1/1/12
Sales
Cost percentage
Estimated cost of ending inventory

P572,500
205,000
P777,500
644,000
P133,500

P2,000,000
980,000
P2,980,000
2,240,000
P 740,000
280,000
P 460,000

P1,000,000
800,000
20,000
P1,820,000
1,505,000
P 315,000
160,000
P 155,000

P 575,400
P1,950,000
491,400
( 352,560)

P3,015,200
515,560
( 522,360)
P3,008,400
70%

Estimated cost of ending inventory

Less undamaged goods:
Goods out on consignment
Goods in transit

2,088,840
P2,664,240

2,105,880
P 558,360

P 558,360
P 195,000
69,500

32

264,500

Chapter 4 - Inventories
Estimated inventory fire loss
4-22.

P 293,860

(Chic Department Store)

a.

FIFO cost basis

Inventory, June 1
Purchases
Available for sale
Sales
Inventory, June 30 at retail
Cost percentage (2,400,000/4,000,000)
Estimated cost of inventory

Cost
P 355,000
2,400,000
P2,755,000

Cost of goods available for sale

Retail
P 750,000
4,000,000
P4,750,000
3,500,000
P1,250,000
60%
P 750,000
P2,800,000

Less estimated cost of ending inventory

Estimated cost of goods sold
b.

750,000
P2,050,000

Average cost basis

Inventory, June 30 at retail
Cost percentage (2,755,000/4,750,000)
Estimated cost of inventory
Cost of goods available for sale

P1,250,000
58%
P 725,000
P2,800,000

Less estimated cost of ending inventory

Estimated cost of goods sold
4-23.

P2,075,000

(London Company
Average cost retail
Cost
Beginning Inventory
145,000
Purchases
283,920
Additional markups
Markup cancellations
Markdown
Markdown cancellations
Total available for sale
428,920
Cost to retail ratio (428,920/565,600=75.8%
Sales , net of sales returns
Ending inventory at retail
Ending inventory at average cost retail (130,800 x 75.8%)

4-24.

725,000

Retail
160,000
420,800
25,200
(9,200)
(38,100)
6,900
565,600
(434,800)
130,800
99,146

(Alemars Drygoods, Inc.)

Retail
P1,050,000
735,000
80,000
( 15,000)
(105,000)
P1,745,000
(1,050,000)

Beginning Inventory
Purchases
Markups (1,600 x 50)
Markup cancellations (300 x 50)
Markdowns
Total
Sales Revenue

33

Chapter 4 - Inventories
Ending Inventory, at retail
Physical inventory on January 31, 2012
Inventory shortage at retail value

4-25.

(Uniwide Sales)
(a) (1) Average retail
Beginning Inventory
Purchases
Purchase Allowance
Freight In
Departmental Transfers In
Additional Markups
Markup Cancellations
Markdowns (6,000 4,500)
Total
Sales
Inventory Shortage
Ending Inventory, at retail
Cost to retail ratio (523,380/671,000)
Ending Inventory, at estimated average cost

P 695,000
665,000
P 30,000

Cost
P185,700
339,380
( 11,000)
7,300
2,000

_________
P523,380

Retail
P202,000
458,000

3,000
12,000
( 2,500)
(1,500)
P671,000
(374,000)
(7,000)
P290,000
78%
P226,200

(2) FIFO retail (exclude the beginning inventory in computing the cost ratio)
337,680/469,000 = 72%
Ending inventory at FIFO cost
72% x P290,000
= P208,800
(b) Cost of goods sold
Average
P523,380
(226,200)
P297,180

Goods available for sale

Ending inventory
Cost of goods sold
4-26.

4-27.

FIFO
P523,380
(208,800)
P314,580

(Grand Central, Inc.)

Profit reported for 2013
Adjustments:
Overstatement of beginning inventory
Understatement of ending inventory
Cash advance for future manufacture and delivery of goods
credited to sales revenue
Correct net income for 2013
(USTFU Company)
(a)
Dec. 31, 2013
Loss on Purchase Commitments
50,000
Estimated Liability on Purchase Commitments
1,000 x (1,200 1,150)
Feb. 28, 2014

34

P658,000
71,000
96,000
(60,000)
P765,000

50,000

Chapter 4 - Inventories
Purchases
Estimated Liability on Purchase Commitments
Accounts Payable

1,150,000
50,000
1,200,000

(b)
Dec. 31, 2013
Loss on Purchase Commitments
50,000
Estimated Liability on Purchase Commitments
1,000 x (1,200 1,150)
Feb. 28, 2014
Purchases
1,200,000
Estimated Liability on Purchase Commitments
50,000
Accounts Payable
Recovery of Loss on Purchase Commitments

50,000

1,200,000
50,000

MULTIPLE CHOICE QUESTIONS

Theory
MC1 D
MC2 A
MC3 D
MC4 D
MC5 D

MC6
MC7
MC8
MC9
MC10

Problems
MC22
MC23
MC24
MC25
MC26
MC27

D
C
A
B
D
B

MC28
MC29
MC30
MC31

C
B
C
C

MC32

MC33
MC34

C
B

MC35
MC36
MC37

C
C
C

MC38

A
A
D
A
A

MC11
MC12
MC13
MC14
MC15

C
A
A
C
D

MC16
MC17
MC18
MC19
MC20
MC21

A
D
D
C
D
D

90,000 x .80 x ..90 = 64,800; 64,800 + 5,000 = 69,800

150,000 x .85 x .90 x .95 = 109,012.50
109,012.50 x .98 = 106,832.25
3,280,000 + 900,000 80,000 = 4,100,000 x 3% =123,000; 123,00027,000=96,000
1,500,000 + 50,000 = 1,550,000
(b) 450,000 1.5 = 300,000; (d) 600,000 + 60,000 = 660,000
300,000 1.5 = 200,000 + 30,000 = 230,000
3,000,000 + 300,000 + 660,000 + 230,000) = 4,190,000
5,000,000 + 80,000 + 800,000 25,000 = 5,855,000
77,500 + 6,000 = 83,500
550,000 + 90,000 + 380,000 + 450,000 + (150,000 x .80) = 1,590,000
104,000 1.3 = 80,000; 80,000 x .30 = 24,000
24,000 + 56,000 + (32,500 25,000) = 87,500
(3,000 x 35) + (2,000 x 36) + (1,000 x 37) = 214,000 Sales
(4,000 x 25) + (2,000 x 26) = 152,000 CGS; 214,000 152,000 = 62,000
(1,600 x 8) + (4,800 x 9.60) = 58,880; 58,880 6,400 = 9.20
Confidence: cost 22; NRV = 30 3 = 27; lower is 22
Positive attitude: cost 55; NRV = 80 28 = 52; lower is 52
(1,000 x 25)+(2,000 x 36)+(3,000 x 120) +(4,000 x 18) =529,000
600,000 + 1,500,000 (2,240,000 1.4) = 500,000
2,550,000 + 250,000 300,000 = 2,500,000 Purchases
2,800,000 + 900,000 700,000 = 3,000,000 Sales
3,000,000 1.25 = 2,400,000 CGS
180,000 + 2,500,000 2,400,000 = 280,000; 280,000 110,000 =170,000 short
CGS-2011 = 1,040,000; CGS-2012 =1,550,000; total CGS (2011 and 2012) = 2.59M
2011 and 2012 sales = 1,700,000 + 2,000,000 = 3,700,000; 2.59/3.7 = 70%

35

Chapter 4 - Inventories

MC39

MC40

MC41

MC42

MC43
MC44

A
C

MC45

520,000 + 2,180,000 (2,500,000 x 70%) = 950,000

950,000 (70% x 150,000) 95,000 = 750,000
408,8976 524,200 = 78%; 450,200 5,100 = 445,100; 445,100 x 78% = 347,178
105,650 + (378,245 10,295) = 473,600; 473,600 - 347,178 =126,422
126,422 69,738 5,000 = 51,684
400,000 + 1,280,000 740,000 = 940,000 Direct materials used
940,000 + 960,000 + (50%x 906,000) = 2,380,000 Total mfg. Cost
4,000,000 x 75% = 3,000,000 Cost of goods sold
3,000,000 + 1,310,000 1,500,000 = 2,810,000 Cost of goods avail for sale
2,380,000 + 1,100,000 2,810,000 = 670,000
617,000 + 1,281,000 21,000 + 31,000 = 1,908,000 Avail for sale at cost
1,057,000 + 2,158,000 35,000 = 3,180,000 Avail for sale at retail
1,908,000 3,180,000 = 60% Cost to retail ratio
3,180,000 2,365,000 + 62,000 = 877,000; 877,000 780,000 = 97,000
97,000 x 60% = 58,200
47,075 + 213,327 + 3,400 = 263,802 Avail for sale at cost
70,025 + 306,375 = 18,900 7,800 10,640 = 376,860 Avail for sale at retail
263,802 376,860 = 70%; 320,500 x 70% = 224,350
376,860 320,500 = 56,360; 56,360 39,390 = 16,970; 16,970 x 70% = 11,879
23,000 + 120,000 = 143,000; 60,000 + 220,000 + 20,000 40,000 = 260,000
260,000 180,000 = 80,000; 143,000/260,000 = 55%; 55,000 P 80,000 =44,000
600,000 10,000 4,000 100,000 = 486,000

36