CHAPTER 7: INVENTORIES

PROBLEM 6: FOR CLASSROOM DISCUSSION

1. Solution:
Cost of inventory on Dec.
Scenarios: 31 Net cash payment on Jan. 5
a. FOB Destination, Freight prepaid None 100,000
b. FOB Shipping point, Freight collect 100,000* 100,000
c. FOB Destination, Freight collect None 94,000
d. FOB Shipping point, Freight
prepaid 106,000 106,000

2. Solution:
Unadjusted balance 180,000
(a) Goods received on consignment (30,000)
(d) Unsold goods sent out on consignment (18,000 x 1/2) 9,000
(e) Freight on unsold goods out on consignment (2,000 x 1/2) 1,000
Adjusted balance 160,000

3. Solution:
Inventory Accounts payable
Unadjusted balances 500,000 120,000
(a) 60,000 -
(b) (80,000) (80,000)
(c) 50,000 50,000
(d) 30,000 -
Adjusted balances 560,000 90,000

4. Solution:
a. Inventory on display shelves 100,000
b. Inventory stocked in warehouse 250,000
c. Inventory sold under a bill and hold arrangement (20,000)
d. Inventory purchased on installment basis 30,000
e. Inventory pledged as collateral security for a bank loan 60,000
g. Inventory sold with repurchase agreement 10,000
430,000

5. Solutions:
Requirement (a):
Perpetual system Periodic system
(a)
Inventory 450,000 Purchases 450,000
Accounts payable 450,000 Accounts payable 450,000

(b)
Inventory 25,000 Freight-in 25,000
 Cash 25,000 Cash 25,000

(c)
Accounts payable 10,000 Accounts payable 10,000
Inventory 10,000 Purchase returns 10,000

(d)
Accounts receivable 800,000 Accounts receivable 800,000
Sales 800,000 Sales 800,000

Cost of goods sold 380,000 No entry

Inventory 380,000

(e)
Sales returns 9,000 Sales returns 9,000
Accounts receivable 9,000 Accounts receivable 9,000

Inventory 4,275 No entry

Cost of goods sold 4,275

Requirement (b):

Perpetual system

Sales 800,000
Sales returns (9,000)
Net sales 791,000
Cost of sales (380,000 – 4,275) (375,725)
Gross profit 415,275

Periodic system

Sales 800,000
Sales returns (9,000)
Net sales 791,000
Cost of sales:
Beginning inventory 20,000
Net purchases (450K + 25K – 10K) 465,000
Total goods avail. for sale 485,000
Ending inventory (109,275) (375,725)
Gross profit 415,275

6. Solution:
Purchase price, gross of trade discount 100,000
Trade discount (20,000)
Non-refundable purchase tax 5,000
 Freight-in (Transportation costs) 15,000
Commission to broker 2,000
Total cost of inventories 102,000

The advertisement costs are selling costs. These are expensed in the period in which they are
incurred.

7. Solution:
Gross method Net method
Jan. 1, 20x1
Purchases 144,000* Purchases 136,800*
Accounts payable 144,000 Accounts payable 136,800

*(₱200,000 x 80% x 90%) *(₱200,000 x 80% x 90% x 95%)

Jan. 10, 20x1

Accounts payable* 72,000 Accounts payable* 68,400
Purchase discounts 3,600 Cash 68,400
(144,000 x ½ x 5%)
Cash** 68,400

*(144K x ½) * (136.8K x ½)
**(144K x ½ x 95%)

Jan. 31, 20x1

Accounts payable* 72,000 Accounts payable 68,400
Cash 72,000 Purchase discount lost 3,600
Cash 72,000
*(144K x ½)

8. Solution:
Requirement (a): FIFO Periodic
Ending inventory, in units = (3,000 + 2,250 + 10,200 – 2,700 – 7,200) = 5,550

Units Unit cost Total cost

Ending inventory in units 5,550
Allocation to latest purchases:
Jan. 26 2,250 20.60 46,350
Jan. 6 (balance) 3,300 21.50 70,950
Ending inventory in pesos 117,300

TGAS (58,650 + 219,300 + 46,350) 324,300

Less: Ending inventory in pesos (117,300)
COGS 207,000

Requirement (b): FIFO Perpetual

Answers are the same with FIFO Periodic.

OR
Units Unit Cost Total Cost
Balance at January 1, 2002 3,000 19.55 58,650
January 6, 2002 10,200 21.5 219,300
January 7, 2002 (2,700) 19.55 (52,785)
January 26, 2002 2,250 20.6 46,350
January 31, 2002 (7,200) * (154,215)*
Ending inventory 5,550 117,300

*The COGS on the Jan. 31 sale is computed as follows:

Units Unit Cost Total Cost
Jan. 31 sale 7,200
Allocation:
From Jan. 1 (3,000 - 2,700) 300 19.55 5,865
From Jan. 6 (balance) 6,900 22 148,350
COGS - Jan. 31 sale 154,215

COGS = (52,785 + 154,215) amounts taken from table above = 207,000

Requirement (c): Weighted Average Cost Periodic

TGAS in pesos
Weighted ave. unit cost =
TGAS in units
(58,650 + 219,300 + 46,350) = 324,300
Weighted ave. unit cost =
(3,000 + 10,200 + 2,250) = 15,450

Weighted ave. unit cost = 20.99

Ending inventory in units 5,550

Multiply by: Wtd. Ave. Cost 20.99
Ending inventory in pesos 116,494.50

TGAS in pesos 324,300

Less: Ending inventory in pesos (116,494.50)
COGS 207,805.50

Requirement (d): Weighted Average Cost Perpetual

Units Unit Cost Total Cost
Balance at January 1, 2002 3,000 19.55 58,650
January 6, 2002 10,200 21.5 219,300
TGAS 13,200 21.06 277,950
January 7, 2002 (2,700) 21.06 (56,862)
January 26, 2002 2,250 20.6 46,350
TGAS 12,750 20.98 267,438
January 31, 2002 (7,200) 20.98 (151,056)
Ending inventory 5,550 116,382

COGS = (56,862 + 151,056) = 207,918

9. Solutions:
Requirement (a):
Product A Product B Product C Total
Purchase price 100,000 250,000 300,000
Freight-in 12,000 30,000 36,000
Cost 112,000 280,000 336,000

Selling price 210,000 300,000 570,000

Freight-out (10,500) (75,000) (11,400)
NRV 199,500 225,000 558,600

Lower 112,000 225,000 336,000 673,000

Requirement (b):
Product B: (280,000 – 225,000) = 55,000

10. Solution: 200,000 – the amount of write-down in 20x1 because the 20x2 recovery exceeds the
cumulative amount of write-downs recognized in the previous periods (i.e., 250K recovery vs.
200K previous write-down).

CHAPTER 8: INVENTORY ESTIMATION

PROBLEM 5: FOR CLASSROOM DISCUSSION

1. Solutions:
GPR based on sales GPR based on cost
Net sales 600,000
Less: COGS 400,000 (200K ÷ 600K) (200K ÷ 400K)
Gross profit 200,000 33.33% 50%

2. Solution: (40% ÷ 60%) = 66.67%

3. Solution: (50% mark-up based on cost ÷ (100% cost + 50% mark-up) = 33 1/3%

4. Solution: (100% ÷ 142.86%) = 70%

5. Solution:
Accounts payable
30,000 beg.
Payments 480,000 510,000 Net purchases (squeeze)
end. 60,000

Inventory
beg. 80,000
Net purchases 510,000 427,500 COGS (585K - 15K) x 75%
Freight-in 5,000
167,500 end.
 (28,000) goods in-transit
(32,000) consigned goods
(2,500) salvage value
105,000 Inventory loss

6. Solution:
Inventory
beg. 80,000
Gross purchases 517,000 3,000 Purchase returns
Freight-in 5,000 4,000 Purchase discounts
COGS
427,500
(585K - 15K) x 100%/133 1/3%
167,500 end.
(33,500) Undamaged (20% x 167.5K)
Salvage value
(25,125)
(50% x 167.5K x 30%)
108,875 Inventory loss

7. Solutions:
Cost Retail
Inventory, beg. 300,000 375,000
Net purchases (a) 1,056,000 1,495,000
Departmental Transfers-In 2,000 3,000
Net mark-ups (20,000 – 2,000) 18,000
Net mark-downs (6,000 – 1,000) (5,000)
Abnormal spoilage (8,000) (11,000)
TGAS 1,350,000 1,875,000
Net sales (b) (1,375,000)
EI @ retail 500,000

(a) @ cost: 1,180,000 + 30,000 - 150,000 - 4,000 = 1,056,000;

@ retail: 1,500,000 – 5,000 = 1,495,000

(b)

Normal spoilage 400

Sales 1,428,000
Sales returns (56,000)
Employee discounts 2,600
Net sales 1,375,000

Cost ratios:

Cost ratio Total goods avail. for sale at cost

=
(Average cost) Total goods avail. for sale at sales price
Average cost ratio = (1,350,000 ÷ 1,875,000) = 72.00%

TGAS at cost less beg. inventory at cost

Cost ratio
= TGAS at retail less beg. inventory at
(FIFO)
retail
FIFO cost ratio = [(1,350,000 – 300,000) ÷ (1,875,000 – 375,000)] = 70.00%

Average FIFO
Cost ratios 72.00% 70.00%
Multiply by: EI @ retail 500,000 500,000
Ending inventory @ cost 360,000 350,000

Average FIFO
TGAS @ cost 1,350,000 1,350,000
Ending inventory @ cost (360,000) (350,000)
Cost of goods sold 990,000 1,000,000