Assignment Answer Key
Additional Explanation for Chapter 4
Problem 4-1
Data relating to Material B-1 during March 2010 are given below:
March 1 Beginning Balance 150 units @ P40.00 P 6,000
6 Purchase 200 units @ P40.50 P 8,100
12 Requisition 225 units
14 Purchase 250 units @ P41.00 P10,250
17 Requisition 200 units
31 Requisition 40 units
135 units Ending inventory
Required: Use FIFO and Weighted average to compute for the
ending inventory and cost of materials used in the production.
FIFO- Periodic
Ending Inventory:
135 units @ P41 = P 5,535
Cost of Materials Used:
Materials, beginning P 6,000
Purchases (P8,100 + P10,250) 18,350
Total Materials Available P 24,350
Materials, ending ( 5,535)
Cost of Materials Used P 18,815
FIFO- Perpetual
P18,815.00
Weighted Average -Periodic
Cost of Materials Used
Inventory – January 1 P 6,000.00
Purchases 18,350.00
Materials Available P24,350.00
Inventory – January 31 ( 5,478.30)
Cost of Materials used P18,871.70
Moving Average -Perpetual
Cost of Materials Used
Inventory – January 1 P 6,000.00
Purchases 18,350.00
Materials Available P24,350.00
Inventory – January 31 ( 5,502.35)
Cost of Materials used P18,847.65
Problem 4-2
LOWER OF TOTAL COST OR TOTAL NRV
LOWER OF TOTAL COST OR TOTAL NRV BY GROUP
Summary of Inventory Valuation:
MATERIAL BASIS VALUATION
Group I NRV P55,000.00
Group II NRV 14,950.00
Inventory valuation P69,950.00
SPECIFIC IDENTIFICATION Problem 1
AMG Manufacturing Company which uses the periodic
inventory system showed the following transactions during the
month of May.
Date Units Purchased Unit cost Units issued
5/1 BI 10 P15 -
5/5 20 20 -
5/15 - - 15
5/19 - - 10
5/24 15 18 -
5/30 - - 15
What is the cost of ending inventory under the specific
identification method, assuming that materials issued on 5/15
came from the 5/5 purchase, materials issued on 5/19 came
from beginning inventory, and those issued on 5/30 came from
the 5/5 and 5/24 purchases?
Suggested Solution:
ACCOUNTING FOR INVENTORY WRITEDOWN
If the cost is lower than net realizable value, there is
no accounting problem because the inventory is
measured at cost and the increase in value is not
recognized. (Cost < NRV)
If the net realizable value is lower than the cost, the
inventory is measured at net realizable value and the
decrease in value is recognized. (Cost > NRV)
METHODS OF ACCOUNTING FOR INVENTORY
WRITEDOWN
Direct Method or Cost of goods sold method
The inventory is recorded at the lower of cost or net realizable value.
This method is also known as cost of goods sold method because any
loss on inventory write-down is not accounted for separately but
buried in the cost of goods sold.
Allowance method or loss method
The inventory is at cost and any loss on inventory writedown is
accounted for separately.
This method is also known as loss method because a loss account,
“loss on inventory write-down” is debited and a valuation account,
“allowance for inventory write-down” is credited.
Illustration:
December 31, 2019 December 31, 2020
Inventory at Cost P360,000 P420,000
Inventory at Net Realizable Value 348,000 416,000
Computation for Inventory Write-down:
Cost - December 31, 2019 360,000
Net Realizable Value 348,000
Inventory Write-down 12,000
ACCOUNTING FOR INVENTORY WRITE-DOWN
DIRECT METHOD
The inventory is recorded at lower of cost and net realizable value at year-
end.
Inventory – December 31, 2020 348,000
Income Summary 348,000
ALLOWANCE METHOD
The inventory is recorded at cost at year-end.
Inventory – December 31, 2020 360,000
Income Summary 360,000
The inventory write-down is accounted for separately:
Loss on inventory write-down 12,000
Allowance for Inventory Write-down 12,000
INVENTORY MEASUREMENT (December 31,2020)
Cost
NRV
Inventory Write-down P 4,000
Allowance for Inventory WD, December 2020 P 4,000
Allowance for inventory WD, December 2019 (12,000)
Gain on reversal of inventory write-down P 8,000
Journal entry for Reversal of Inventory Write-
down
December 31, 2020:
Allowance for Inventory WD 8,000
Gain from reversal of Inventory WD 8,000
Greece Company provided the following data for the current
year:
Inventory –January 1
Cost P3,000,000
P200,000
Net realizable value 2,800,000
Net Purchases 8,000,000
Inventory- December 31
Cost 4,000,000
P300,000
Net realizable value 3,700,000
What amount should be reported as cost of goods sold?
ANSWER:
DIRECT METHOD:
Inventory, January 1 P 2,800,000
Net Purchases 8,000,000
Total P10,800,000
Inventory- December 31 (3,700,000)
Cost of Goods Sold P 7,100,000
ANSWER:
ALLOWANCE METHOD:
Inventory, January 1 P 3,000,000
Net Purchases 8,000,000
Total P11,000,000
Inventory- December 31 (4,000,000)
Cost of Goods Sold P 7,000,000
Add: Loss on Inventory WD 100,000
Actual Cost of Goods Sold P 7,100,000
Illustration 2: (Problem 4-4)
The Joy Novelty Company uses a perpetual inventory system. On April 2019, its
statement of financial position included the following items related to the materials
inventory:
Materials Inventory at Cost P880,875
Less: Allowance for Inventory WD 61,980
Materials Inventory, @ LCNRV P818,895
Required:
Journal (adjusting) entries for the following assumptions:
1. After one year, on April 2020, the perpetual inventory account showed a balance
of P890,220. The net realizable value was P825,330.
2. Assume the same facts as #1, except that net realizable value was P870,165.
3. Assume the same facts as #1, except that net realizable value was P894,540.
Requirement 1:
After one year, on April 2020, the perpetual inventory account
showed a balance of P890,220. The net realizable value was
P825,330.
Loss on inventory write-down 2,910
Allowance for inventory write-down 2,910
To record loss resulting from decline in Net Realizable Value of
inventory.
Computation:
Inventory @ cost P890,220
Inventory @ NRV 825,330
Inventory Write-down P 64,890 > 61,980 = 2,910
Requirement 2:
Assume the same facts as #1, except that net realizable value was
P870,165.
Allowance for inventory write-down 41,925
Recovery from inventory write-down 41,925
To record recovery resulting from adjustment
of allowance account.
Computation:
Inventory @ cost P890,220
Inventory @ NRV 870,165
Inventory Write-down P 20,055 < 61,980 = 41,925
Requirement 3:
Assume the same facts as #1, except that net realizable value was
P894,540.
Allowance for inventory write-down 61,980
Recovery from inventory write-down 61,980
To record recovery resulting from adjustment
of allowance account.
Computation:
Inventory @ cost P890,220
Inventory @ NRV 894,540
Inventory Write-down 0 < 61,980 = 61,980
Illustration 3: (Problem 4-6)
“ If people are doubting how far
you can go, go so far that you
can’t hear them anymore.
-MICHELE RUIZ-
”
END OF PRESENTATION☺☺☺
