Accounting 21 Intermediate Accounitng 1

Inventories

PROBLEM No. 1 – Recording of Inventory Purchase

1. Journalize the following transactions for Armour Inc. using both the periodic inventory system and the perpetual inventory
system, presented in a side-by-side format shown at the end of this exercise.

Oct.7 Sold merchandise on credit to Rondo Distributors, terms n/30, FOB destination, P1,200; the cost of the
merchandise was P720.

Oct. 8 Purchased merchandise, P10,000, terms FOB shipping point, 2/15, n/30, with prepaid freight charges of P525
added to the invoice.

PERIODIC INVENTORY PERPETUAL INVENTORY

Accounts DR CR | DR CR
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2. Journalize the following transactions for Dulcimer Inc. using both the periodic inventory system and the perpetual
inventory system, presented in a side-by-side format shown at the end of this exercise.

Oct. 9 Merchandise sold on October 7 accepted back from Rondo Co. for full credit and returned to merchandise
Inventory, P300; the cost of the merchandise was P180.

Nov. 5 Received payment in full of P900 from Pine Co. for sale of merchandise on Oct. 25.

PERIODIC INVENTORY PERPETUAL INVENTORY

Accounts DR CR | DR CR
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3. Journalize the following transactions for Donnell Inc. using both the periodic inventory system and the perpetual inventory
system, presented in a side-by-side format shown at the end of this exercise.

Oct. 5 Purchased P30,000 of merchandise from Rex on account, terms 2/10, n/30.

Oct. 8 Returned merchandise purchased on account on Oct. 5 amounting to P500.

Oct. 15 Paid for purchase of Oct. 5, less Oct. 8 return and purchase discount.

PERIODIC INVENTORY PERPETUAL INVENTORY

Accounts DR CR | DR CR
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PROBLEM No. 2 – Recording of Inventory Transactions

4. Using the perpetual inventory system, journalize the entries for the following selected transactions:

(a) Sold merchandise on account, for P12,000. The cost of the merchandise sold was P6,500.
(b) Sold merchandise to customers who used MasterCard and VISA, P9,500. The cost of the
merchandise sold was P5,300.
(c) Sold merchandise to customers who used American Express, P2,900. The cost of the merchandise
sold was P1,700.
(d) Paid an invoice from First National Bank for P385, representing a service fee for processing
MasterCard and VISA sales.
(e) Received P4,325 from American Express Company after a P115 collection fee had been deducted.

5. Merchandise with a list price of P4,200 and costing P2,300 is sold on account, subject to the following terms: FOB
destination, 2/10, n/30. The seller prepays the freight costs of P85 (debit Freight Out for the freight costs). Prior to
payment for the goods, the seller issues a credit memo for P750 to the customer for merchandise costing P425 that is
returned. The correct amount is received within the discount period. The company uses a perpetual inventory system.

Record the foregoing transactions of the seller in the sequence indicated below.

(a) Sold the merchandise, recognizing the sale and cost of merchandise sold.
(b) Paid the freight charges.
(c) Issued the credit memo.
(d) Received payment from the customer.

PROBLEM No. 3 – Payment of Purchases on Credit

6. Details of invoices for purchases of merchandise are as follows:

Returns and
Merchandise Freight Terms Allowances
(a) P800 P45 FOB shipping point, 1/10, n/30 P200
(b) 4,600 --- FOB destination, n/30 800
(c) 2,400 55 FOB shipping point, 2/10, n/30 600
(d) 7,500 --- FOB destination, 1/10, n/30

Determine the amount to be paid in full settlement of each of the invoices, assuming that credit for returns and allowances
was received prior to payment and that all invoices were paid within the discount period.

PROBLEM No. 4 – Adjustment to Inventory Balance

7. At the close of its fiscal year on March 31, 2002, Gren Industries, Inc. was in the process of relocating its plant. This
resulted in some confusion relating to the inventory cutoff, as indicated by the following:

(1) Merchandise on hand costing P1,794 was included in the inventory although the purchase
invoice was not recorded until April 12, 2002.
(2) Merchandise shipped on April 1, 1999, was included in inventory--the cost of this
merchandise was P2,219, and the sale was recorded as P3,138 on March 31, 2002.
(3) Merchandise costing P12,150 was included in the inventory although it was shipped to a
customer on March 31, 2002, FOB shipping point; the company recorded the sale of
P19,246 on that date.
(4) Merchandise costing P1,820 was not counted.
(5) Merchandise in transit (shipped to the company FOB destination) was recorded as a
purchase as of April 2, 2002, and its cost of P17,287 was not included in the March 31,
2002, inventory.

Assuming that the company does not maintain a perpetual inventory system and that the books for the fiscal year have
been closed, provide the necessary correcting entries. (Ignore income taxes.)

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PROBLEM No. 5 – Inventory Valuation based on COST

8. Brutus Corporation, a newly formed corporation, has the following transactions during May, 2011, it’s first month of
operation.

May 1 Purchased 500 units @ P25.00 each

May 4 Purchased 300 units @ P24.00 each
May 6 Sold 400 units @ P38.00 each
May 8 Purchased 700 units @ P23.00 each
May 13 Sold 450 units @ P37.50 each
May 20 Purchased 250 units @ P25.25 each
May 22 Sold 275 units @ P36.00 each
May 27 Sold 300 units @ P37.00 each
May 28 Purchased 550 units @ P26.00 each
May 30 Sold 100 units @ P39.00 each

Calculate total sales, cost of goods sold, gross profit and ending inventory using each of the following inventory methods:
1. FIFO Perpetual
2. FIFO Periodic
3. LIFO Perpetual
4. LIFO Periodic
5. Average Cost Periodic (round average to nearest cent)

PROBLEM No. 6 – Inventory Misstatement

9. Kingston Company reported the following net income amounts:

1999 ........................................ P52,000

2000 ........................................ P38,000
2001 ........................................ P66,000

In 2002, the company discovered errors that been made in computing the ending inventories for 1999 and 2000, as
follows:
1999 Ending inventory understated by P4,000.
2000 Ending inventory understated by P8,000.

Compute the correct net incomes for (1) 1999, (2) 2000, and (3) 2001.

PROBLEM No. 7 – Inventory Repossession

The ESTELLA MARIE Company values its inventory at the lower of FIFO cost or net realizable value (NRV). The inventory
accounts at December 31, 2009, had the following balances.

Raw materials 650,000

Work in process 1,200,000
Finished goods 1,640,000

The following are some of the transactions that affected the inventory of the Estella Marie Company during 2010.

Jan.8 Stella Marie purchased raw materials with list price of P200,000 and was given a trade discount of 20%
and 10%; terms 2/15, n/30. Estella Marie values inventory at the net invoice price.

Feb 14 Estella Marie repossessed an inventory item from a customer who was overdue in making payment. The
unpaid balance on the sale is P15,200. The repossessed merchandise is to be refinished and replaced
on sale. It is expected that the item can be sold for P24,000 after estimated refinishing costs of P6,800.
The normal profit for this item is considered to be P3,200.

Mar. 1 Refinishing costs of P6,400 were incurred on the repossessed item.

Apr. 3 The repossessed item was resold for P24,000 on account, 20% down.

Aug. 30 A sale on account was made of finished goods that have a list price of P59,200 and a cost P38,400. A
reduction of P8,000 off the list price was granted as a trade-in allowance. The trade-in item is to be priced
to sell at P6,400 as is. The normal profit on this type of inventory is 25% of the sales price.

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Based on the above and the result of your review, answer the following:
(Assume the client is using perpetual inventory system.)

10. The entry on Jan. 8 will include a debit to Raw Materials Inventory of
11. The repossessed inventory on Feb. 14 is most likely to be valued at
12. The journal entries on April 3 will include a
13. The trade-in inventory on Aug. 30 is most likely to be valued at
14. How much will be recorded as Sales on Aug. 30?

PROBLEM No. 8 – Inventory Valuation based on LOWER OF COST OR NET REALIZABLE VALUE (LCNRV)
You observed the inventory count of the SAL2 COMPANY as of December 31, 2010. The client prepared the summary
presented below and gave it to you for verification:

Quantity Cost (P) NRV (P) Amount (P)

A 360 units 3.60/doz. 3.64/doz. 1,310.40
B 24 units 4.70 each 4.80 each 112.80
C 28 units 16.50 each 16.50 each 1,353.00
D 43 units 5.15 each 5.20 each 176.80
E 400 units 9.10 each 8.10 each 3,640.00
F 70 dozens 2.00 each 2.00 each 140.00
G 95 grosses 144.00/gross 132.00/gross 13,780.00

15. You determine from your examination that the proper value for Item A should be
16. You have also determined that the value for item E is
17. Based on your findings, Item C should be valued at
18. Based on your working paper, the proper value of the inventory as of December 31, 2010 is

PROBLEM No. 9 – Inventory Estimation using Gross Profit Method

19. Northstar Sales Corp. was organized on January 1, 2001. On December 31, 2002, the company lost most of its inventory
in a warehouse fire just before the year-end count of inventory was to take place. Data from the records disclosed the
following:

2001 2002
Inventory, January 1 P 0 P173,120
Purchases during year 860,000 692,000
Purchase returns and allowances during year 46,120 64,600
Sales during year 788,000 836,000
Sales returns and allowances during year 16,000 20,000

On January 1, 2002, Northstar's pricing policy was changed so that the gross profit rate would be 3 percentage points
higher than the one earned in 2001.

Salvaged undamaged merchandise was marked to sell at P24,000, while damaged merchandise marked to sell at
P16,000 had an estimated net realizable value of P3,600.

Determine the company's inventory loss due to the fire that occurred on December 31, 2002.

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PROBLEM No. 10 – Inventory Estimation using Retail Inventory Method

Presented below is information related to Carpenter Inc.
Cost Retail
Inventory, 12/31/15 P375,000 P 550,000
Purchases 1,369,000 2,050,000
Purchase returns 90,000 120,000
Purchase discounts 27,000 –
Gross sales (after employee discounts) – 2,110,000
Sales returns – 145,000
Markups – 180,000
Markup cancellations – 60,000
Markdowns – 65,000
Markdown cancellations 30,000
Freight-in 63,000 –
Employee discounts granted – 12,000
Loss from breakage (normal) – 8,000

20. Assuming that carpenter Inc. uses the conventional retail inventory (or LCNRV) method, compute the cost of its
ending inventory at December 31, 2016.

21. Assuming that carpenter Inc. uses the average method, compute the cost of its ending inventory at December 31, 2016.

22. Assuming that carpenter Inc. uses the FIFO cost method, compute the cost of its ending inventory at December 31,
2016.

PROBLEM No. 11 – Biological Assets

23. Reed Mangus purchased the Hillside Vineyard at an estate auction in April 2015 for P1,250,000. The purchase was risky
because the growing season was coming to an end, the grapes must be harvested in the next several weeks, and Reed
has limited experience in carrying off a grape harvest.

At the end of the first quarter of operations, Reed is feeling pretty good about his early results. The first harvest was a
success; 500 bushels of grapes were harvested with a value of P50,000 (based on current local commodity prices at the
time of harvest). And, given the strong yield from area vineyards during this season, the net realizable value of Reed’s
vineyard has increased by P25,000 at the end of the quarter. After storing the grapes for a short period of time, Reed was
able to sell the entire harvest for P60,000.

Instructions
(a) Prepare the journal entries for the Hillside biological asset (grape vines) for the first quarter of operations (the
beginning carrying and net realizable value is P1,250,000).
(b) Prepare the journal entry for the grapes harvested during the first quarter.
(c) Prepare the journal entry to record the sale of the grapes harvested in the first quarter.
(d) Determine the total effect on income for the quarter related to the Hillside biological asset and agricultural produce.

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Answer Section

1. ANS:
SALES OF MERCHANDISE ON CREDIT

Oct.7 Sold merchandise on credit to Rondo Distributors, terms n/30, FOB destination, P1,200; the cost of the
merchandise was P720:

PERIODIC INVENTORY SYSTEM PERPETUAL INVENTORY SYSTEM

Oct. 7 Accounts Receivable 1,200 Accounts Receivable 1,200

Sales 1,200 Sales 1.200

Cost of Merchandise Sold 720

Merchandise Inventory 720

Purchase of Merchandise with DELIVERY COSTS

Oct. 8 Purchased merchandise, P10,000, terms FOB shipping point, 2/15, n/30, with prepaid freight charges of P525
added to the invoice.

PERIODIC INVENTORY SYSTEM PERPETUAL INVENTORY SYSTEM

Oct. 8 Purchases 10,000 Merchandise Inventory 10,525

Freight in 525 Accounts Payable 10,525
Accounts Payable 10,525

DIF: Difficult
2. ANS:
RETURN OF MERCHANDISE SOLD

Oct. 9 Merchandise sold on October 7 accepted back from Rondo Co. for full credit and returned to merchandise
inventory, P300; the cost of the merchandise was P180:

PERIODIC INVENTORY SYSTEM PERPETUAL INVENTORY SYSTEM

Oct. 9 Sales Returns & Allowances 300 Sales Returns & Allowances 300
Accounts Receivable 300 Accounts Receivable 300

Merchandise Inventory 180

Cost of Merchandise Sold 180

RECEIPTS ON ACCOUNT

Nov. 5 Received payment in full of P900 from Pine Co. for sale of merchandise on Oct. 25.

PERIODIC INVENTORY SYSTEM PERPETUAL INVENTORY SYSTEM

Nov. 5 Cash 900 Cash 900

Accounts Receivable 900 Accounts Receivable 900

DIF: Difficult

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3. ANS:
Oct. 5 Purchased P30,000 of merchandise from Rex on account, terms 2/10, n/30.

PERIODIC INVENTORY SYSTEM PERPETUAL INVENTORY SYSTEM

Oct. 5 Purchases 30,000 Merchandise Inventory 30,000

Accounts Payable 30,000 Accounts Payable 30,000

Oct. 8 Returned merchandise purchased on account on Oct. 5 amounting to P500.

PERIODIC INVENTORY SYSTEM PERPETUAL INVENTORY SYSTEM

Oct. 8 Accounts Payable 500 Accounts Payable 500

Purchases Returns Merchandise Inventory 500
and Allowances 500

Oct. 15 Paid for purchase of Oct. 5, less Oct. 8 return and purchase discount.

PERIODIC INVENTORY SYSTEM PERPETUAL INVENTORY SYSTEM

Oct. 15 Accounts Payable 29,500 Accounts Payable 29,500

Cash 28,910 Cash 28,910
Purchases Dis. 590 Merchandise Inventory 590

DIF: Difficult
4. ANS:
(a) Accounts Receivable 12,000
Sales 12,000

Cost of Merchandise Sold 6,500

Merchandise Inventory 6,500

(b) Cash 9,500

Sales 9,500

Cost of Merchandise Sold 5,300

Merchandise Inventory 5,300

(c) Accounts Receivable 2,900

Sales 2,900

Cost of Merchandise Sold 1,700

Merchandise Inventory 1,700

(d) Credit Card Expense 385

Cash 385

(e) Cash 4,325

Credit Card Expense 115
Accounts Receivable 4,440

DIF: Difficult

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5. ANS:
(a) Accounts Receivable 4,200
Sales 3,800

Cost of Merchandise Sold 2,300

Merchandise Inventory 2,300

(b) Freight Out 85

Cash 85

(c) Sales Returns and Allowances 750

Accounts Receivable 750

Merchandise Inventory 425

Cost of Merchandise Sold 425

(d) Cash 3,381

Sales Discounts 69
Accounts Receivable 3,450

DIF: Difficult
6. ANS:
(a) P639 (P800 - P200 - P6 + 45)
(b) P3,800 (P4,600 - P800)
(c) P1,819 (P2,400 - P600 - P36 + P55)
(d) P7,425 (P7,500 - P75)

DIF: Difficult
7. ANS:
(1) Retained Earnings ....................... 1,794
Purchases ............................. 1,794
(2) Retained Earnings ....................... 3,138
Sales ................................. 3,138
(3) Retained Earnings ....................... 12,150
Inventory ............................. 12,150
(4) Inventory ............................... 1,820
Retained Earnings ..................... 1,820
(5) No entry required. Transaction handled correctly.

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8. ANS:
Total Sales (not dependant on inventory method):

May 6 400 @ 38.00 = P 15,200.00

May 13 450 @ 37.50 = 16,875.00
May 22 275 @ 36.00 = 9,900.00
May 27 300 @ 37.00 = 11,100.00
May 30 100 @ 39.00 = _ 3,900.00
Total Sales 1,525 units P56,975.00

Total Goods Available for Sale

May 1 500 @ 25.00 = P 12,500.00
May 4 300 @ 24.00 = 7,200.00
May 8 700 @ 23.00 = 16,100.00
May 20 250 @ 25.25 = 6,312.50
May 28 550 @ 26.00 = 14,300.00
Total GAFS 2,300 units P56,412.50

1. & 2.
FIFO Perpetual FIFO Periodic: There is no difference between these methods since FIFO is always first-in, first-
out

Cost of Goods Sold & Ending Inventory

Ending Inventory
Total Units - Units Sold = Ending Inventory
2,300 - 1,525 = 775 Units

225 @ P25.25 = P 5,681.25

550 @ P26.00 = 14,300.00
Ending Inventory: P19,981.25

Cost of Goods Sold

Total Goods Available P56,412.50
Less Ending Inventory 19,981.25
COGS: P36,431.25

Gross Profit
Total Sales P56,975.00
Less COGS 36,431,25
Gross Profit: P20,543.75

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3.
Inventory Valuation Perpetual LIFO
Date Purchased Units / Balance
Price Units Sold Cost Inventory Balance
1-May 500 25.00 12,500.00
4-May 300 24.00 7,200.00
Bal. 19,700.00
6-May 300 24.00 (7,200.00)
100 25.00 (2,500.00)
Bal. 400 25.00 10,000.00
8-May 700 23.00 16,100.00
Bal. 400 25.00 10,000.00
700 23.00 16,100.00
26,100.00
13-May 450 23.00 (10,350.00)
Bal. 400 25.00 10,000.00
250 23.00 5,750.00
15,750.00
20-May 250 25.25 6,312.50
Bal. 22,062.50
22-May 250 25.25 (6,312.50)
25 23.00 (575.00)
27-May 225 23.00 (5,175.00)
75 25.00 (1,875.00)
Bal. 325 25.00 8,125.00
28-May 550 26.00 14,300.00
30-May 100 26.00 (2,600.00)

End 325 25.00 8,125.00

Bal. 450 26.00 11,700.00
LIFO Valuation: 19,825.00

Ending Inventory
Total Units - Units Sold = Ending Inventory
2,300 - 1,525 = 775 Units

325 @ P25.00 = P 8,125.00

450 @ P26.00 = 11,700.00
Ending Inventory: P19,825.00

Cost of Goods Sold

Total Goods Available P56,412.50
Less Ending Inventory 19,825.00
COGS: P36,587.50

Gross Profit
Total Sales P56,975.00
Less COGS 36,587.50
Gross Profit: P20,387.50

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4.
Ending Inventory

500 @ P25.00 = P 12,500.00

275 @ P24.00 = 6,600.00
Ending Inventory: P19,100.00

Cost of Goods Sold

Total Goods Available P56,412.50
Less Ending Inventory 19,100.00
COGS: P37,312.50

Gross Profit
Total Sales P56,975.00
Less COGS 37,312,50
Gross Profit: P19,662.50

5.
Average Cost Calculation: P56,412.50 / 2,300 units = P24.53

Ending Inventory: 775 units x P24.53 = P19,010.75

Cost of Goods Sold: P56,412.50 - P19,010.75 = P37,401.75

Gross Profit: P56,975.00 - P37,401.75 = P19,573.25

DIF: Difficult
9. ANS:
(1)
1999 net income:
As reported .......................................... P52,000
Correction for 1999 inventory understatement ......... 4,000
Corrected net income ................................. P56,000

(2)
2000 net income:
As reported .......................................... P38,000
Correction for 1999 inventory understatement ......... (4,000)
Correction for 2000 inventory understatement ......... 8,000
Corrected net income ................................. P42,000

(3)
2001 net income:
As reported .......................................... P66,000
Correction for 2000 inventory understatement ......... (8,000)
Corrected net income ................................. P58,000

10. ANS:
P141,120
200,000 x .08 x .9 x .98 = P141,120

DIF: Moderate
11. ANS:
P24,000

Estimated selling price 24,000

Less refinishing costs 6,800
NRV 12,700
Less normal profit 3,200
Valuation of repossessed inventory 14,000

DIF: Difficult

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12. ANS: D
Cash (24,000 x 20%) 4,800
Accounts receivable (24,000 - 4,800) 19,200
Sales - Repossessed inventory 24,000
Cost of Repossessed Goods Sold (14,000+6,400) 20,400
Repossessed Inventory 20,400

DIF: Difficult
13. ANS:
P4,800

Estimated selling price (NRV) 6,400

Less normal profit (6,400 x 25%) 1,600
Valuation of trade-in inventory 4,800

DIF: Difficult
14. ANS:
P56,000

Accounts receivable (59,200-8,000) 51,200

Trade-in inventory (4) 4,800
Sales 56,000

DIF: Difficult
15. ANS:
P108

16. ANS:
P3,240

17. ANS:
P462

18. ANS:
P18,364.25

Per Audit Per client

Quantity Cost (P) NRV (P) Amount (P)
A 360 units 3.60/doz. *108.00 1,310.40
B 24 units 4.70 each 112.80 112.80
C 28 units 16.50 each **462.00 1,353.00
D 43 units 5.15 each ***221.45 176.80
E 400 units 8.10 each 3,240.00 3,640.00
F 70 dozens 2.00 each ****1,680.00 140.00
G 95 grosses 132.00/gross 12,549.00 13,780.00
18,364.25 20,513.00
*(360/12) x 3.60
** 28 x 16.50
***43 x 5.15
****(70 x 12) 2.00

DIF: Difficult

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19. ANS:
2001 2002
Gross Gross
Profit % Profit %
Sales (net) P772,000 100% P816,000 100%
Cost of goods sold:
Beginning inventory P 0 P173,120
Purchases (net) 813,880 627,400
Goods available for P813,880 P800,520
sale
Ending inventory 173,120 147,720 ***
Cost of goods sold P640,760 83% P652,800 ** 80%
Gross profit on sales P131,240 17% P163,200 20%
* 17% + 3% = 20%
** P816,000 x 80% = P652,800
*** P800,520 - P652,800 = P147,720

December 31, 2002

Ending inventory (cost) ..................... P147,720
Less: Cost of undamaged inventory P19,200
(P24,000 ´ .80) ....................
Net realizable value of damaged merchandise . 3,600 22,800
Inventory loss due to fire .................. P124,920

20. ANS:
Cost Retail
Beginning Inventory P 375,000 P 550,000
Purchases 1,369,000 2,050,000
Purchase returns (90,000) (120,000)
Purchase discounts (27,000) –
Freight-in 63,000 –
Markups P 180,000 –
Markup cancellations (60,000) 120,000
Totals P1,690,000 2,600,000
Markdowns (65,000) –
Markdown cancellations 30,000 (35,000)
Sales (2,110,000) –
Sales returns 145,000 (1,965,000)
Inventory losses due to breakage (8,000)
Employee discounts (12,000)
Ending inventory at retail P 580,000

Cost-to-retail ratio = 1,690,000 / 2,600,000 = 65.00%

Ending inventory at cost: P580,000 x 65% = P377,000

21. ANS:

Cost-to-retail ratio = 1,690,000 / 2,565,000* = 65.89%

*2,600,000 - 35,000

Ending inventory at cost: P580,000 x 65.89% = P382,162

22. ANS:

Cost-to-retail ratio = 1,315,000* / 2,015,000** = 65.26%

*1,690,000 - 375,000
**2,600,000 - 35,000 - 550,000

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Ending inventory at cost: P580,000 x 65.26% = P378,508

23. ANS:
(a) Biological assets–Grape Vineyard 25,000
Unrealized Holding Gain or Loss – Income 25,000

(b) Grape Inventory 50,000

Unrealized Holding Gain or Loss – Income 50,000

(c) Cash 60,000

Cost of Goods Sold 50,000
Grape Inventory 50,000
Sales Revenue 60,000

(d) Unrealized Holding Gain or Loss – Income P25,000

Unrealized Holding Gain or Loss – Income 50,000
Gross Profit on sold Grapes 10,000
Total Effect on Income P85,000

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