Chapter 10 - Inventories

CHAPTER 10 INVENTORIES TECHNICAL KNOWLEDGE To understand the meaning of inventories. To identify the major classes of inventory. To account for inventory transactions using periodic and perpetual inventory system. To know the gross method and net method of recording purchases. To identify the items included in inventory cost. 271 Neen scone nents an a aDefinition in the ordinary course of for such sale or in the form, .d in the production process Inventories are assets held for sale business, in the process of production of maierials or supplies to be consumes or in the rendering of services. Inventories encompass gods purchased and held for resale, for example: a. Merchandise purchased by a retailer and held for resale b. Land and other property held for resale by subdivision entity and real estate developer. Inventories also encompass finished goods produced, goods im process and materials and supplies awaiting use in the production process. Classes of inventories Inventories are broadly classified into two, namely inventories of a trading concern. and inventories of manufacturing concern. ‘A trading concern is one that buys and sells goods in the same form purchased. The term “merchandise invenitory” is generally applied to goods held by a trading concern. A manufacturing concern is one that buys goods which are altered or converted into another form before they are made available for sale. The inventories of a manufacturing concern are: a. Finished goods b. Goods in process c. Raw materials d. Factory or manufacturing suppliesDefinitions Finished goods are completed Products whic! Finished goods have manufacturing costs, h are ready for sale. been assigned their full share of aegis is ee or work in process are partially completed products which require furthe: iets Hae i, T process or work before they Raw materials are goods that are to be used in the production process. No work or process has been done:on them as yet by the entity inventorying them Broadly, raw materials cover all materials used in the manufacturing operations, However, frequently raw materials are restricted to materials that will be physically incorporated in the production of other goods and which can be traced directly to the end product df the production process. Factory or manufacturing supplies are similar to raw materials but their relationship to the end product is indirect. Factory o1 manufacturing supplies may be referred to as indirect materials. It is indirect because they are not physically incorporated in the products being manufactured. There are other manufacturing supplies like paint and nails which become part of the finished product. However, since the amounts involved are insignificant it is’ impractical to attempt to allocate their costs directly to the product. These supplies find their way into the product cost as part of the manufacturing overhead. 273‘ tory i ible in the inve™ 5 cn ee 5 which the entity bas tHe shall be includeg arule, all goods location. : 7 rdless of 1 r in the inventory, regal ig a legal language which meang ‘The phrase “passing of title” mnership changes. “the point of time at which ow Legal test . inventoried? Is the entity the owner of the goods to be im om ‘ If the answer is in the affirmative, the goods shalt 0e tn uded in the inventory. If the answer is in the negative, the inventory. Applying the legal test, the following items are includible in inventory: . Goods owned and on hand a. . Goods in transit and sold FOB destination a. B sae F c. Goods in transit and purchased FOB shipping point d. Goods out on consignment e £ the goods shall be excluded from . Goods in the hands of salesmen or agents z Goods held by customers on approval or on trial Exception to the legal test Installment contracts may provide for retention of title by the seller until the selling price is fully collected. Following the legal test, the goods sold on installment basis are still the property of the seller and therefore normally includible in his inventory. However, in such a case, itis an acce] i Q pted accounting procedure {preeond oe bet ae ae aregular sale involving deferred the part of the buyer. T and as a regular purchase 00 Thus, i of the ween a creda nmeRt are included in the inventory to the contrary notwithstan ing. it of is seller, the legal test This is a clear ‘ legal form, "Pl° of economic substance prevailing 0” 27Who is the owner of 80o0ds in transit? This will depend on the term: inati FOB shipping point. Pop a eae hee, destination or Under FOB destination, ownership of goods purchased is transferred only upon receipt of, polatof dectinwtiee tpt of the goods by the buyer at the Thus, under FOB destination, the goods i it i Tos et ON aes in transit are still the Accordingly, the seller shall legally be responsible for freight charges and other expenses up to the point of destination. On the other hand, if the term is FOB shipping point, ownership is transferred upon shipment of the goods and therefore, the goods in transit are the property of the buyer. Accordingly, the buyer shall legally be responsible for freight charges and other expenses from the point of shipment to the point of destination. In practice, during an accounting period, the accountant normally records purchases when goods are received and sales when goods are shipped, regardless of the precise moment at which title passed. This procedure is expedient and no material misstatements occur in the financial statements because title usually passes in the same accounting period. f However, the accountant should carefully analyze the invoice terms of goods that are in [Link] the end of the accounting period to determine who has legal title. Accordingly, adjustments are in order if errors are committed in recording purchases and sales.Freight terms — Freight collect -'This means that the freight coe ead shipped is not yet paid, The common S02 cht charger’ Shipped is not yet pais, under this, the freight charge i, actually paid by tie buyer. i i is hat the Freight prepaid — This means ¢ goods shipped is already paid by the seller. ‘The terms "FOB destination” and “FOB shipping poini 5 it and the party who determine ownership of the goods in trans! i ight charge and other expenses from is supposed to pay the freig! fF aeatina fiat the point of shipment to the point o: ‘The terms "freight collect" and "freight prepaid" determine the party who actually paid the freight charge but not the party who is supposed to legally pay the freight charge. freight charge on the Maritime shipping terms FAS or free alongside — A seller who ships FAS must bear all expenses and risk involved in delivering the goods to the dock next to or alongside the vessel on which the goods are to be shipped. The buyer bears the cost of loading and shipment and thus, title passes to the buyer when the carrier takes possession of the goods. CIF or Cost, insurance and freight — Under this shipping contract, the buyer agrees to pay in a lump sum the cost of the goods, insurance cost and freight charge. The shipping contract may be modified as CF which means that the buyer agrees to pay in a lump sum the cost of the goods and freight charge only. In either case, the seller must pay for the cost of loading. Th'S, f title and risk of loss shall pass to i a the goods to the carrier. P he buzer upon delivery Ex-ship — A seller who delive: expenses and risk of loss un! which time title and risk of ers‘the goods ex-ship bears al til the goods are unloaded * loss shall pass to the buyer: Ay era acne rerConsigned goods det Sd tn ee f muting en in wich ow 1e co: ; eaitain gooda toan ee transfers physical possession of on the owner’s behalf called the consignee who sells them Consigned goods shall be included i led in the consignor’s inventor and excluded from the consignee's snventaee = Freight and other handling charges o1 ds i aze part of the cost of geais consigned, Nenment When consigned 00ds are sold by the consignee, a report is made to the consignor together with a cash remittance for the amount of sales minus commission and other expenses chargeable to the consignor. For example, a consignee sells consigned goods for P100,000. This amount is remitted to the consignor less commission of P15,000 and advertising of P2,000. The consignor simply records the cash remittance from the consignee as follows: Cash 83,000 Commission 15,000 Advertising 2,000 Sales 100,000 Incidentally. consigned goods are recorded by the consignor by means of a memorandum entry. Statement presentation Inventories are generally classified as current assets. The i ies shall be presented as one line item in the The inventories shal be Per detail of te inventories shall be disclosed in the notes to financial statements. ” i ition of the For example, the note shall disclose the composit inventories of a manufacturing entity as finished goods, goods in process, raw materials and manufacturing supplies. 277Accounting for inventories ‘Two systems are offered in on periodic system and perpetual sy ae The periodie system calls for the physical ea ae te hand at the end of the accoun' perio’ : . a cons , ‘The quantities are then multiplied by te oormeet ane zai costs to get the inventory value for B de arian: jurposes. This approach gives ‘actual or physica! ‘iodi gure is generally used when the The periodic inventory proce pee oe pean, uel ta individual inventory items have small d auto parts. g for inve! ntories, namely groceries, hardware an On the other hand, the perpetual system requires the maintenance of records called stock-cards that usually offer a yunning summary of the inventory inflow and outflow. Inventory increases and decreases are reflected in the stock cards and the resulting balance represents the inventory. This approach gives book or perpetual inventories. The perpetual inventory procedure is commonly used where the inventory items treated individually represent a relatively large peso investment such as jewelry and cars. In an ideal perpetual system, the stock cards are kept to reflect and control both units and costs. : Consequently, the entity would be able to know the inventory on hand at a particular moment in time. In recent years, the widespread use of co 5 5 F mputers has enabled practically all large trading and manufacturing entities 1 maintain a perpetual inventory system. With computers, the entitie: effecti 18, 8 can. convenie: ively store and retrieve large amount of enter ick ‘When the perpetual system is used, a physical count of the at \e on hand should at least bi alesis [Link] the at te le once a year to confirm dl 278Illustration - Periodic system 1. Purchase of merchandise. on account, P300,000. Purchases Accounts payable =e 300,000 Payment of freight on the purchase, P20,000. Freight in 20,000 Cash 20,000 . Return of merchandise purchased to supplier, P30,000. Accounts payable 30,000 Purchase'return , 30,000 | Sale of merchandise on account, P400,000, at 40% gross profit. Accounts receivable 400,000 Sales 400,000 . Return of merchandise sold from customer, P25,000. Sales return 000 ‘Accounts receivable 25,000, Adjustment of ending inventory, P65,000. Merchandise inventory-end ee Income summary 65,000 279Illustration — Perpetual sys! 4 tem P300,000 Purchase of merchandise 07 agcount, 300,000 Merchandise inventory 300,000 Accounts payable 00. . Payment of freight on the purchase, P20,0 20,000 Merchandise inventory sions Return of merchandise purchased to supplier, P30,000, 30,000 Accounts payable 50006 Merchandise inventory Sale of merchandise on account, P400,000 at gross profit of 40%. The cost of merchandise sold is 60% or P240,000. Accounts receivable 400,000 Sales 400,000 Cost of goods sold 240,000 Merchandise inventory 240,000 Under the perpetual system, the cost of merchandise sold is immediately recorded because this is clearly determinable from the stock card. Return of merchandise sold from customer, P25,000. The cost of the merchandise returned is 60% or P15,000. Sales return ‘Accounts receivable 25000, | | is Merchandise inventory Cost of goods sold 26.000 sto Adjustment of ending inventory, ma pega be alasiding inventory is not adjustes- represents the ending ioveaee inventory accou”Inventory shortage Or overage ustration, the . of 985,000. e merchandise inventory account has debit * different amount, an adjustmgnt i any tnventory shortage or average, For example, if the physical oo 7 P55,000, the following adjustaisap : moe ae Inventory shortage 10,000 Merchandise inventory (65,000 - 55,000) ‘ 10,000 The'inventory shortage is usually closed to cost of goods sold because this is often the result of normal shrinkage and breakage in inventory, However, abnormal and material shortage shall be separately classified and presented as other expense, Trade discounts and cash discounts Trade discounts are deductions from the list or catalog price in order to arrive at the invoice price which is the amount actually charged to the buyer. Thus, trade discounts are not recorded. The purpose of trade discounts is to encourage trading or increase sales. Trade discounts also suggest to the buyer the price at which the goods may be resold. Cash discounts are deductions from the invoice price when Payment is made within the discount period. The purpose of cash discounts is to encourage prompt payment. Cash discounts are recorded as. purchase discount by the buyer and sales discount by the seller. Purchase discount is deducted from purchases to arrive at net purchases and sales discount is deducted from sales to arrive at net sales revenue. 281Illustration The list price of a merchandise purchased 15,500, 000'ton, 20% and 10%, with credit terms of 5/10, ‘This means that trade discounts are 20% anes and. the cash discount is 5% if payment is made in 10 day: ‘i js paid if the payment is made The full amount of the invoice is P' jod of 80 days. after 10 days and within the credit pe? List price 500,000 First trade discount (20% x 500,000) (200,000) 400,000 Second trade discount (10% x 400,000) ( 40,000) Invoice price 360,000 Cash discount ( 5% x 360,000) (18,000) Payment within the discount period 342,000 The journal entry to record the purchase is: Purchases . 360,000 360,000 Accounts payable Note that the trade discounts are not recorded. The journal entry to record the payment of the invoice within the discount period is: Accounts payable 360,000 Cash 342,000 Purchase discounts 18,000 Methods of recording purchases 1. Gross method - Purchases and accounts payable a” recorded at gross. . Om ed method — Purchases and accounts payable are record at net. | | | | | | |Illustration ~ Grogs method 1, Purchases on account, P200,000, 2/ 10, n/30. Purchases Accounts payable Roane 200,000 2, Assume payment is made within the discount period. Accounts payable Cash ck 196,000 Purchase discount 4,000 3. Assume payment is made beyond the discount period. Accounts payable 200,000 Cash 200,000 Illustration — Net method 1. Purchases on account, P200,000, 2/10, n / 30. Purchases 196,000 Accounts payable 196,000 2. Assume payment is made within the discount period. Accounts payable 196,000 Cash 196,000 3. Assume payment is made beyond the discount period. Accounts payable 196,000 Purchase discount lost (other expense) 4,000 Cash 200,000 4. ‘Assume it is the end of accounting period, no payment is made and the discount period has expired. Purchase discount lost 4,000 4000 Accounts payable . a 283Gross method vs. net method resents the cag] ‘The cost measured under the "ef gid ee “) equivalent price on the date of parm theoretically correct historical boat: ais shases at However, in practice, most entities record pure gross invoice amount. - jolates the matching principle ‘Technically, the gross sgothd ve : fen taken or when cash because discounts are recor s nh is paid rather than when purchases that give rise to the discounts are made. Moreover, this procedure does not allocate discounts taken between goods sold and goods on hand. Despite its theoretical shortcomings, the gross method is | supported on practical grounds. | ‘The gross method is more convenient than the net method from a bookkeeping standpoint. Moreover, if applied consistently over time, it usually produces no material errors in the financial statements. Cost of inventories The cost of inventories shall comprise; a. Cost of purchase b. Cost of conversion ¢. Other cost incurred in bringing i i! i n the ca present location and condition ee All rights belongs to respective authors I e consider buving the o FeCost of purchase be ch co Pa of inventories comprises the purchase ice, LIN] wn i i aot i cs ae recoverable taxes, freight, handling finished goods, material. od ee ne sna ehte ion a Trade discounts, rebates and other similar i in determining the cost of Birchese, —— The cost of purchase sh: differences which arise dj of inventories involving all not include foreign exchange irectly from the recent acquisition a foreign currency, Moreover, when inventories are purchased with deferred settlement terms, the difference between the purchase price for normal credit terms and the amount paid is recognized as interest expense over the period of financing. Cost of conversion ‘The cost of conversion of inventories includes cost directly related to the units of production such as direct labor. It also includes a systematic allocation of fixed and variable production overhead that is incurred in converting materials into finished goods. Fixed production overhead is the indirect cost of production that remains relatively constant regardless of the volume of production. Examples are depreciation and maintenance of factory building and equipment, and the cost of factory management and administration. i ic i indi f production Variable production overhead is the indirect cost of that varies directly with the volume of production. Examples are indirect labor and indirect materials. 285 .5 head Allocation of fixed production ove d to the cost The allocation of fixed production eee: Senos ie conversion is based on the normal capa facilities. . be achieved Normal capacity is the production es under noma average over a number of periods or se f capacity resultin, cireumstances taking into account the loss of oaP . from planned ‘maintanance. d to each unit of The amount of fixed overhead allocate! 7 production is not increased as consequence of low production or idle plant. Unallocated fixed overhead is recognized as expense in the period in which it is incurred. Allocation of variable production overhead Variable production overhead is allocated to each unit of production on the basis of the actual use of the production facilities. A production process may result in more than one product being produced simultaneously. This is the case, for example, when joint products are produced or where there is a main product and a by-product. When the costs of conversion are not separately identifiable, they are allocated between the products on @ rational and consistent basis, for example, on the basi value of each product, is of the relative sales Most by-products by their nature are not material. By-products are measured at alizal is deducted from the cost of the main le value and this value Product.Other cost a tL eee < tee of inventories only to the extent Jocation and condition. ‘Zing the inventories to their present For example, it may be designing product for inventories. appropriate to include the cost of Specific customers in the cost of However, the followin; inventories and reco; incurred: € costs are excluded from the cost of enized as expenses in the period when a Abnormal amounts of wasted materials, labor and other production costs, be Storage costs, unless these costs are necessary in the production process prior to a further production stage. Thus, storage-costs on goods in process are capitalized but storage costs on finished goods are expensed. c. Administrative overheads that do not contribute to bringing inventories to their present location and condition. a, Distribution or selling costs Cost of inventories of a service provider The cost of inventories of a service provider consists primarily of the labor and other costs of personnel directly engaged in providing the service, including supervisory personnel and attributable overhead. Labor and other costs relating to sales and general administrative personnel are nol included but are recognized as expenses in the period in which they incurred.QUESTIONS 1. Define inventories. 2. Explain the two classes of inventory. 3, What goods are inciudible in inventory’? 4, What is the legal test of determining inventory inclusion? 5. Who is the owner of goods in transit 6. Explain FOB destination. 7, Explain FOB shipping point. | 8. Explain freight prepaid. | 9: Explain freight collect. | . 10. What do you understand by the maritime terms FAS, CIF, CF and Ex-ship? t LL. What is consignment? | 12, Who is the owner of goods on consignment? | 13, Explain the statement presentation of inventories. | 14. Explain the two systems of accounting for inventories. | 15. Distinguish trade discourits and cash discounts. | 16. Explain the two methods of accounting for purchases. | 17. What are the components of the cost of inventories? | 18. Explain cost of purchase. © | 19. Explain cost of conversion. | | | | 20. Explain the cost of inventory of a service provider. 288 All rights belongs to respective authorsPROSLEMS Problem 10-1 (IAA) Amiable Company provided the following data at year-end: Items counted in the bodega Items included in the count specifically ‘egret EY per sales contract : 100,000 Items in receiving department, returned by customer, in good condition 50,000 Items ordered and in the receiving department, invoice not received 400,000 Items ordered, invoice received but goods not received. Freight is paid by seller. 300,000 Items shipped today, invoice mailed, FOB shipping point 250,000 Items shipped today, invoice mailed, FOB destination 150,000 Items currently being used for window display 200,000 Items on counter for sale 800,000 Ttems in receiving department, refused by us because of damage 180,000 Items included in count, damaged and unsalable 50,000 Items in the shippingdepartment 250,000 Required: Compute the correct amount of inventory.Problem 10-2 (IAA) information: Natal Company provided the following infor 1,409,000 Materials 200,000 ‘Advance for materials ordered 650.000 Goods in process 60,000 Unexpired insurance on inventories ‘oon Advertising catalogs and shipping cartons 2,000, ‘000 Finished goods in factory tail store, 7 Finished goods in company-owned retav' stor 760,000 including 50% profit on cost Jin . Finished goods in hands of consignees include son.p0¢ 40% profit on sales sipped FOB . Finished goods in transit to customers, shippe' 2b tie destination at cost 100'000 Finished goods out on approval, at cost on Unsalable finished goods, at cost oe Office supplies ioe 000 Materials in trancit shipped FOB shipping point, excluding freight of P30,000 330,000 Goods held on consignment, atsales price, cost P10,000 200,000 Required: Compute the correct amount of inventory. Problem 10-3 (IAA) Luminous Company provided the following information at current year-end: ~ Finished goods in storeroom, at cost including overhead of P400,000 000,000 Finished goods in transit, including freight charge of 20,000, FOB shipping point 250,000 Finished goods held by salesmen, at selling price, cost, P100,000 140,000 Goods in process, at cost of materiale and direct labor ~ 720,000 Materials ,000 Materials in transit FOB destination "60,000 jefective materials returned to: is Shigpi = ale suppliers for replacement So Gasoline and cil for testing finishe goods Y Machine lubricants es 1 Required: Compute cost of inventory at current year-end. Ay ea usersProblem 10-4 (IAA) Tee = whaledéles of car seatcovers. At the nt Year, the entity's inventory consi: ted of 90 car Seatcovers Priced at P1,000 each. Duting the curect year, the following events occurred: 1. Purchased 800 car Seatcovers on account at P1,000 each, ctive car seatcovers to supplier and received credit. = 3, Paid 600 of the car seatcovers 4, Sold 790 car seatcovers at P2000 meet 5. Received 20 car seatcovers returned by a customer and gave credit. The goods were in excellent condition. 6. Received cash for 680 of the car _seatcovers sold. 7. Physical count at year-end revealed 60 units on hand. Required: a. Prepare journal entries, including adjustments to record the above transactions assuming the company uses periodic system and perpetual system. b. Determine the cost of sales under each inventory system. Problem 10-5 (ACP) Winter Company received quotations from two entities for an item of merchandise as follows: : List price P500,000, less 20-10-10, FOB FT ne eae point, 2/10, n/30, _ . Ligt price P500,000 less 35, FOB shipping From Company B: Oe PTO, 10. Required: i tand the amount Ft tion, compute the invoice amount a to be ned by the buyer within the discount period. 291Problem 10-6 (IAA) ided the fo! ‘Autumn Company provi s. current year, the first year of operation! tan invosce price of P4.750,009 1. Purchase-of merchandise at 31/10 'n /30. a, eluding frees o00. The fet 8 allocated to eash aera enton pureaases, 3,717,000. ofwhich 1,617,000 4. This Baad yan he uta on wna accounts payable 5. Sn Deco ai, oe fifth of the merchandise semaine on han lowing transactions for the Required: s. Prepare journal entries to record the transactions using gross method and net method. b. Compute inventory and cost of sales under each method. Problem 10-7 (LAA) Fall Company began operations in the current year. ‘The entity used perpetual inventory system. 1. During the year, Fall Company purchased merchandise having a gross invoice cost of P1,000,000, All purchases were made under the terms 2/10, n/30, FOB destination. 2. Fall Company paid freight charge of P50,000. ne the year, Fall Company paid for 80% of the merchandise within the discount period. 4, ‘Ths remaining 20% was paid beyond the discount period. 5. Feil Company sold 70% of the merchandise it acquired for es a 1,200,000. The other 30% remained in inventory #! Required: Prepare journal entri method and:et'nie < record the transactions using grossProblem-10-8 (AICPA Adapted) yriad C| Me tions ea Fevealed the following purchase urred during the last few days of the fiscal ear, which end ‘ that date,” December 81, and in the first few days after L An toroing for P50,000, FOB shipping point, was received anc’ recorded on December 27, The shipment was received in satisfactory condition on January 2. The merchandise was not included in the inventory. 2. An invoice for P75,000, FOB destination, was received and recorded on December 28. ‘The shipment was received in satisfactory condition on January 3. The merchandise was not included in the inventory. 3. An invoice for P30,000, FOB shipping point, was received and recorded on January 4. The invoice shows that the goods had been shipped on December 28 and the receiving report indicates that the goods had been received on, January 4. The merchandise was excluded from inventory. 4. An invoice for P90,000, FOB shipping point, was received on December 15. The receiving report indicates that the goods were received on December 18 but across the face of the report 1s the notation “merchandise not of the same quality as ordered - returned for credit, December 19”. The merchandise was included in the inventory. 5. An invoice for P140,000, FOB destination, was received and recorded on January 4. The receiving report indicates that the goods were received on December 29. The merchandise was included in inventory. Required: Prepare the adjustments on December 31. Books are still Open. 298Adapted) Problem 10-9 (AICP. mber 31, 2020 at . Dece: Hero Company reported inventory or oe ods priced at cost, 6,000,000 based on a physical oN ‘nt relating to the and before any necessary yea! vend adjustime the following * Included in the physical co customer FOB shipping point on ] ‘These goods had a cost of P125,000 and were picked up by the carrier on January 10, 2021. i ippi i December 28, 2020 * Goods shipped FOB shipping point on” Ue i from a aCe to Hero Company were received on January 4, 2021. The invoice cost was P300, What amount should be reported as inventory on December 31, 20207 a. 5,875,000 b. 6,000,000 ¢. 6,175,000 d. 6,300,000 Problem 10-10 (AICPA Adapted) Empty Company reported inventory on December 31, 2020 at ‘P2,500,000 based on physical count priced at cost and before any necessary adjustment for the fullewing: * Merchandise costing P100,000, shipped FOB shipping int 5 ipping pol from a vendor on December 30, 2020 was received and recorded on January 5, 2021. * Goods in the shipping area were excluded from inventory although shipment was not made until January 5, 2021. ‘The goods billed to the customer FOB shipping point 01 Deseetbet 30, 2020 had cou of P400000 ere goods billed to unt weember 31, 2020, a should be reported as inventory on Decembé a. 2,500,000 b. 2,600,000 c. 2,900,000 d. 8,000,000Problem 10-11 (AICPA Adapted) Dignity, Company ha, : transactions during the cache jollowing consignment Inventory shipped on consi i jet baad Dignity Commecnt 8 consignee 600,000 Inventory received on consignment from a cone; 00 Freight paid by consignes ONES Ee No sales of consigned goods were made during the current year. Wa anipak should be reported as consigned inventory at a. 700,000 b. 650,000 c. 850,000 d. 600,000 Problem 10-12 (AICPA Adapted) Kindness Company regularly buys sweaters and is allowed a trade discount of 20% and 10%. The entity made a purchase on March 20 and received an invoice with a list price of P900,000, a freight charge of 50,000, and payment terms of net 30 days. What is the cost of the purchase? a. 648,000 ' b. 630,000 c. 698,000 d. 680,000 Problem 10-13 (AICPA Adapted) On June 1, Compassion Company sold merchandise with a list price of P1,000,000 to a customer. ity allowed trade discounts of 20% and 10%. Credit terms week 1/30 mths sale was made FOB shipping point. i for the customer as i 4d P50,000 of delivery cost Fenty prep i Oeotomer paid in fall on dune iL What amount is received from the customer as full remittance? 8. 684,000 b. 734,000 ¢. d. . 720,000 . 770,000 295Problem 10-14 (AICPA Adapted) unts payable on December 3 Kew Company reported acco pera allswing date 1, 2020 at P2,200,000 before considerint + Goods shipped to Kew FOB shipping point on December 22, 2020 were lost in transit. ‘The invoice cost of P40,000 was not recorded by Kew. On January 7, 2021, Kew filed a 40,000 claim against the common carrier. si + On December 27, 2020, a vendor authorized Kew to return for full credit goods shipped and billed at P70,000 on December 15, 2020. The returned goods were shipped by Kew on December 28, 2020. A P70,000 credit memo was received and recorded by Kew on danuary 5, 2021. + On December 31, 2020, Kew has a P500,000 debit balance in accounts payable to Ross, a supplier, resulting from a 500,000 advance payment for goods to be manufactured. What amount should be reported as accounts payable on December 31, 2020? 2,170,000 2,680,000. 2,730,000 2,670,000 poseProblem 10-18 (AICPA Adapteg) Black Company reported ag, . 2020 at P4,500,000 before ae Payable on December 31, e neces: ~ ji pting to the following trae ‘sary year-end edjustments actions: * On December 27, 2020, Black Co: , >t mpany wrote and recorded checks to creditors totaling 2,000,000 causing an overdraft * On December 28, 2020, Black Company purchased and received goods for P760,000 terms 2/10, 780. Black Company records Purchases and accounts payable at net amount. The invoice was recorded and paid January 5, 2021. * Goods shipped FOB destination, 5/10, n/30 on December 20, 2020 from a vendor to Black Company were received January 15, 2021. The invoice cost was P325,000. On December 31, 2020, what amount should be reported as accounts payable? 7,575,000 1. 7,250,000 7,235,000 |. 7,558,500 Peep 297Problem 10-16 (AA) 3020 revealed that Joyous nt on December 31. 26 4 410,000. A physical cout d inventory with @ © Company had s were excluded from this amount: The following item * Merchandise of P610,000 jg held by Joyous on consignment, i hipped by Joyous * Merchandise costing p3g0,000 was 5} FOB destination to a customer 00 December 31, 2020, The customer was expected to receive the goods on January 5, 2021. was shipped by Joyous * Merchandise costing 460,000 xr on December 29, 2020. FOB shipping point to a custome! ‘The customer was expected to receive the goods on January 10, 2021. * Merchandise costing P830,000 shipped by a vendor FOB destination on December 31, 2020 was received by Joyous on January 15, 2021. Merchandise costing P510,000 purchased FOB shipping point was shipped by the supplier on December 31, 2020 and received by Joyous on January 5, 2021. What amount of inventory should b ear e reported on December 5,300,000 4,690,000 3,800,000 4,920,000 poreproblem 10-17 (LAA) Audacity Company coy December 31, 2020 and yr before any corrections, nted the ending inventory on “ported the amount of P2,000,000 ttems were included when the total 8 inventory was computed: * Goods located in the entity's warehouse are on consignment from another entity 150,000 * Goods sold by the entity and shipped FOR destination were in transit on December 31, 2020 and received by the customer on January 2, 2021 200,000 Goods purchased by the entity and shipped FOB shipping point were in transit on December 31, 2020 and received by the entity on January 2, 2021 300,000 * “Goods sold by the entity and shipped FOB shipping point were in transit on December 31, 2020 and received by the customer on January 2, 2021. 400,000 What amount of inventory should be reported on December 31, 20207 a. 2,500,000 b. 2,350,000 & 2,900,000 d. 2,760,000Adapted) Problem 10-18 (AICPA Jeount on December s sical Reverend Company conducted SPIT with u total cost of 31, 2020 which revealed mere 5,000,000. However, further investigation ne i items were excluded from the count. cast * Goods sold to a customer which are es 2 ae the customer to call at the customer's conve Cost of P200,000. * A packing case containing 4 product standing in the shipping room inventory was taken. ‘The product was not included in the inventory because it was marked “hold for shipping instructions - ‘The investigation revealed that the customer's order was dated December 28, 2020, but that the case was shipped and the customer billed on January 5, 2021. * A special machine costing 250,000 fabricated to order for a customer was finished and specifically segregated at the back part of the shipping room on December 31, 2020. ‘The customer was billed on that date and the machine was excluded from inventory although it was shipped on January 5, 2021. * Goods in process costing P300,000 held by an outside processor for further processing. * Goods costing P50,000 shipped by a vendor FOB seller on December 31, 2020 and received by the entity 00 January 10, 2021. What: is the correct amount of i i reported on December 81, 2020? inventory that should a, 5,500,000 b. 5,550,000 c. 6,850,000 d. 5,800,000 aled that the following costing P500,000 wag when the physical 300 All rights bel | | |Problem 10-19 (LAA) 7,600,000. , ioe aoe 0,000 ae received from a vendor on q e i : recorded on January 12, 2021 vayeinesvae repetvediand The goods were shi neue pped December 31, 2020 FOB shipping * Goods costing P850,000 we: e shipped on Di toa cusiomer FOB shipping moet on Doember 3, 2000 The goods were included in ending inventory for 2020 even though the sale was recorded in 2020, A P350,000 shipment of goods to a customer on December 31, 2020 FOB destination was not included in the year-end inventory. The goods cost P260,000 and were delivered to the customer on January 15, 2021. The sale was properly recorded in 2021. * An invoice for goods costing P350,000 was received and recorded 4s a purchase on December 31, 2020. The related goods shipped FAS were in transit on December 31, 2020 and received on January 5, 2021 and were not included in the physical inventory. * A P1,050,000 shipment of goods to a customer on December 30, 2020 FOB destination was recorded as a sale in 2020. The goods costing P840,000 and delivered to the customer on January 5, 2021 were not included in 2020 ending inventory. What is the correct inventory on December 31, 2020? . 9,300,000 b. 7,610,000 ©. 8,100,000 4. 8,450,000 a, 301Problem 10-20 (AICPA Adapted) White Company’ usual ales terms ate 9° ie POO Foe eecee aa ecomber 31, 2020, before year-end adjustment i thorized a custo: = Dece: 7, 2020, White Company auth ner eras goods shipped and billed at P50,000 on December 15, 2020. White Compan; The returned goods were received by C Y on January 8, 2028 ‘and a P50,000 credit memo was issued on the same date. * Goods with an invoice amount of P300,000 were billed toa | cuatoitior BARUAT 10, 2021. The goods were shippedon December 31, 2020. * Goods with an invoice amount of P200,000 were billed and recorded on December 30, 2020. The goods were shipped ondanuary 5, 2021. On January 5, 2021, a customer notified White Company that goods billed at P500,000 and shipped on December 31, 2020 were lost in transit. What amount of net sales should be reported for the current year’ a. 5,050,000 b. 5,550,000 c. 4,550,000 d. 4,450,000 Problem 10-21 (AICPA Adapted) Purple Company had sales of P4,000,000 during December of the current year. Experience has shown that merchandise equaling 7% of sales will be returned within 30 days and aD additional 3% will be returned within 90 days. Returned merchandise is readily resalable. In addition, merchandise equaling 15% of sales will be exchanged for merchandise of equal'or ereater ‘value. What amount should be reported for net sales for the month of December? a. 8,600,000 b. 3,400,000 - 3,120,000 302 eT eter obs au creerProblem 10-22 (AICPA Adapted) Yellow Company, a distributor of ii tise tone of machinery, bought a ede © manufacturer in Noyember 2020 for On December 30, 2020, the entity sold this machine for P760,000, under the following terms: 2% discount if paid within thirty days, 1% discount if paid after thirty days but within sixty days, or payable in full within ninety days if not paid within the discount periods. However, the customer hed the right to return this machine to Yellow Company if it was unable to resell the machine before expiration of the ninety-day payment period, in which case the customer's obligation to Yellow Company would be canceled. In the net sales for the year ended December 31, 2020, what amount should be included for the sale of the machine? a. 750,000 b. 735,000 c. 742,500 a. 0 Problem 10-23 (AICPA Adapted) On October 1, 2020, Indomitable Company sold 100,000 gallons of heating oil at P30 per gallon. Fifty thousand gallons were delivered on December 15, 2020, and the remaining 50,000 gallons were delivered on January 15, 2021 2020, 25% on Payment + were: 50% due on October 1, , the ‘art dclivery: and the remaining 25% due on the second delivery. What amount of sales revenue should b e recognized during 2020? a. 3,000,000 b. 1,500,000 ©. 2,250,000 4. 1,000,000Problem 10-24 (AICPA Adapted) distributor of automotive “ yealed the following initia) Fancy Company is a wholes: replacement parts. The entity re amounts on December 31, 2020: 1,250, Inventory at December 31 based on physical count a tones Accounts payable 9,000,000 Additional information ‘A. Parts held on consignment from another entity to Fancy Company, the consignee, amounting to P165,000, were included in the physical count on December 31, 2020, and in accounts payable on December 31, 2020. B. P20,000 of parts which were purchased and paid for in December 2020, were sold in the last week of 2020 and appropriately recorded as sales of P28,000. ‘The parts were included in the physical count on December 31, 2020, because the parts wore on the loading dock waiting to be picked up by the customers. C. Parts in transit on December 31, 2020 to customers, shipped FOB shipping point, on December 28, 2020, amounted to P34,000. The customers received the parts on January 6, 2021. Sales of P40,000 to the customers for the parts were recorded by Fancy Company on January 2, 2021. Di: Rata ae holding P210,000 at cost and P260,000 at , on consi c their stores on Decenber 31 ate pein Eocene E. Goods were in transit fr December 31, 2020, Th: nos e The goods i ‘ 29, 2020, *° *hipped FOB shipping point on Decombet ndor to Fancy Company © cost of goods was P25,000.1, What is the correct amount of inventory? a. 1,300,000 b. 1,320,000 c. 1,334,000 d. 1,090,000 2, What is the correct amount of accounts payable? a. 835,000 b. 960,000 ¢. 975,000 d. 860,000 3. What is the correct amount of sales? 9,250,000 9,290,000 9,040,000 9,000,000 pe ee 805 All rights belongs to respective auttProblem 10-25 (AICPA Adapted) turer of small tools, provided the Quarry Company, a manufacturer of Oe er a, 2020 following information for the ye Inventory at December 31 based on physical count ree Accounts payable at December 31 cone Net sales Additional information ‘A. Included in the physical count were tools billed to a customer FOB shipping point on December 31, 2020. These tools had a cost of P28,000 and were billed at P35,000. The shipment was in loading dock waiting to be picked up by the common carrier. B. Goods were in transit from a vendor to Quarry Company on December 31, 2020. The invoice cost was P50,000, and the goods were shipped FOB shipping point on December 29, 2020. C. Work in process inventory costing P20,000 was sent to an outside processor for plating on December 30, 2020. D. Tools returned by customers and held pending inspection in the returned goods area on December 31, 2020 were not included in the physical count. On January 5, 2021, the tools costing P26,000 were inspected and returned to inventory: Credit memos totaling P40,000 were issued to the customers on the same date. E. Tools shipped to a customer FOB destination on December 26, 2020, were in transit cost of P25,000. on December 31, 2020, and had # Upon notification of receipt by the cust 5, a tomer on January | 2021, Quarry Company issued a sales invoice for P42,000- | 806 | All rights belongs to respective authorsnat ae 5:c0 Pane coat of P30,000, received from a on a receiving report dated Tae 2 ma were recorded The goods were not in I 5 ‘ . the invoice was included in aceon? Physical count but 31, 2020. 8 payable on Decomber G. Goods received from a vendor included in the physical ecto" December 26, 2020 were However, the related Pgo. 000 ve invoi I = , endor invoice was not included in accounts Payable on December 81, “2020 because the accou eens wasieee counts payable copy of the receiving report H. On January 10, 2021, a monthly freight bill in the amount of P20,000 was received. The bill specifically related to merchandise purchased in December 2020, one-half of which was still in the inventory on December 31, 2020. The freight charge was not included in either the inventory or in accounts payable on December 31, 2020. 1. What is the correct amount of inventory? 1,883,000 1,911,000 1,885,000 1,925,000 peop 2. What is the correct amount of accounts payable? a. 1,330,000 b. 2,280,000 ¢. 1,250,000 d. 1,270,000 ? 3. What is the correct amount of net sales? a. 8,460,000 b. 8,500,000 ¢. 8,465,000 d. 8,425,000i S Problem 10-26 Multiple choice (IFRS) not be taken into account i following should » ” + ines) determining ene cost of inventory a. Storage costs of part-finiehed goods b. Trade discounts e c. Recoverable purchase tax a x d. Import duties on shipping of inventory inward 2, The cost of inventory does not include . Salaries of factory staff 8. Storage cost necessary in the production process before a further production stage ¢. Abnormal amount of wasted materials d. Irrecoverable purchase taxes 3. Which of the following costs of conversion cannot be included in cost of inventory? a. Cost of direct labor b. Factory rent and utilities c. Salaries of sales staff f d. Factory overhead based on normal capacity 4. Which of the following should be taken into account when determining the cost of inventory? a. Storage cost of part-finished goods b. Abnormal freight in c. Recoverable purchase tax d. Interest on inventory loan 5. Costs incurred in bringing the inventory to the present location and condition include _ “P a. Cost of designing product for specific ecifi Te b. Abnormal amount of wasted Gatedal ce c. Storage cost not necessary i i ary in the acess before a further production stage ee d. Distribution cost6 a 2 © 10. ee Purch; b. Land and other Stpeiy @ retailer Finished goods prone’, held for sale Mate: i laterials and Supplies for Use in production fi er must classify . a . Properti for sale in the oy course of busty = that it holds a. Inventory b. Property, plant and equi c. Financial asset Saremen d. |. Investment Property are reported as a. Inventory b. Property, plant and equipment c. Investment property d. Prepaid expenses . Which of the following should not be reported as inventory? a. Land acquired for resale by a real estate firm Shares and bonds held for resale by a brokerage firm Partialy completed goods held by a manufacturing entity: Machinery acquired by a manufacturing entity PPS When determining the cost of an inventory, which of the following should’ not be included? Interest on loan obtained to purchase the inventory. Commission paid when inventory is purchased Labor cost of the inventory when manufactured ; Depreciation of plant equipment used in manufacturing peop 309Problem 10-27 Multiple choi L 2. 2 ce (LAA) Why is inventory included in the computation of net income? visi ‘To determine cost of gps old To determine sales reve” To determine aT wake “omputation of net Inventory is not inciut income Bere Which of the following is 2 characteristic of a perpetual invéntory system? a. Inventéry purchases are debited to a purchases account. b. Inventory records are not kept for every item. c. Cost of goods sold is recorded with each sale. d. Cost of goods sold is determined as the amount of purchases less the change in inventory. . Which of the following is incorrect about the perpetual inventory method? a. Purchases are recorded as debit to the inventory account. b. The entry to record a sale includes a debit to cost of goods sold and a credit to inventory. ¢. After a physical inventory count, inventory is credited for any missing inventory. d. Purchase returns are recorded by debiting accounts payable and crediting purchase returns and allowances. An entry debiting inventory and crediti -goods sold would be made when er ae ai ° a. Mershandize is sold and the periodic inventory method _ ae ee sold and the perpetual inventory c. Merchandise i 4, method ia vecg, umHed and the perpetual inventory . Merchandise j method is used. Med @nd the periodic invento"! 310 eS ere ee eonr saucers