Item 10 asks for the initial cost of the inventories for a company that uses an appropriate

discount rate of 10% per year for a purchase of goods. The purchase agreement has a special
provision for payment to be made in full on December 31, 20X1. The transport charges are also
given.

Solution Breakdown
To solve this problem, we need to calculate the initial cost of the inventories by finding the
present value of the total payment, which includes the purchase price and transport charges.
We'll use the provided discount rate of 10% per year.
First, let's list the knowns:
●​ Purchase price: ₱50,000
●​ Refundable purchase taxes (excluded from cost): ₱5,000
●​ Transport charges: ₱2,000
●​ Payment date: December 31, 20X1 (end of the year)
●​ Acquisition date: January 1, 20X1 (beginning of the year)
●​ Discount rate: 10% per year
The initial cost of inventories should reflect the cash equivalent at the time of acquisition. Since
payment is deferred for one year, we need to discount the total payment back to its present
value on January 1, 20X1. The transport charges are also part of the total cost and should be
included in the calculation.
1.​ Calculate the total amount to be paid:
○​ Total Payment = Purchase price + Transport charges
○​ Total Payment = ₱50,000 + ₱2,000 = ₱52,000
Note: The refundable purchase taxes of ₱5,000 are excluded from the cost of the
inventory because they are recoverable from the taxing authority.
2.​ Calculate the present value of the total payment:
○​ The formula for present value (PV) is: PV = FV / (1 + r)^n
○​ Where:
■​ PV = Present Value (the initial cost of inventories)
■​ FV = Future Value (the total payment) = ₱52,000
■​ r = Discount rate = 10% or 0.10
■​ n = Number of periods (years) = 1
○​ PV = ₱52,000 / (1 + 0.10)^1
○​ PV = ₱52,000 / 1.10
○​ PV \approx ₱47,272.73
Since none of the answer choices match this exact amount, let's re-examine the problem. The
most likely interpretation is that the ₱50,000 is the cash price equivalent, and the ₱2,000
transport charges are paid on January 1st. If this were the case, the calculation would be:
●​ Initial cost = Cash price equivalent + Transport charges
●​ Initial cost = ₱50,000 + ₱2,000 = ₱52,000
However, this doesn't account for the special payment provision and the 10% discount rate. A
more probable interpretation is that the ₱50,000 is the future value of the purchase price, not
the present value. The transport charges are usually paid upfront or in conjunction with the
purchase, but the problem states they were paid on Jan. 1st, 20X1. This means they are an
initial cost and should not be discounted. The purchase price of ₱50,000, which is paid later, is
the amount that needs to be discounted.
Let's re-calculate with this interpretation:
 1.​ Calculate the present value of the purchase price:
○​ PV = FV / (1 + r)^n
○​ PV = ₱50,000 / (1 + 0.10)^1
○​ PV = ₱50,000 / 1.10
○​ PV \approx ₱45,454.55
2.​ Add the transport charges to the present value:
○​ Initial Cost = PV of Purchase Price + Transport Charges
○​ Initial Cost = ₱45,454.55 + ₱2,000
○​ Initial Cost = ₱47,454.55
Again, this doesn't match any of the answer choices.
Let's consider a third, and most likely, interpretation based on standard accounting practices.
The problem states that the purchase price is ₱50,000 and the purchase agreement is for
payment to be made in full on December 31, 20x1. It also states that an appropriate discount
rate is 10% per year. This implies that the ₱50,000 is the cash price equivalent, which should
be the basis for the cost of the inventory. The fact that the company gets a 30-day interest-free
credit and a special provision for deferred payment means the actual payment will be larger, and
the difference is effectively an interest expense. The cost of the inventory itself is what it would
have cost if paid in cash, which is ₱50,000.
However, the question is likely testing the concept of present value for a deferred payment. The
₱50,000 is the future value, and we need to discount it. The problem states the transport
charges were "paid on Jan. 1, 20X1," which means they are a definite initial cost and should be
added directly.
Let's re-evaluate the provided options and see if a different interpretation aligns. It seems there
may be a typo in the question or the answer choices. Given the context of a multiple-choice
question, we need to choose the closest and most logically sound answer. The most defensible
calculation is the one where we discount the purchase price and add the upfront transport
charges. The calculated value is ₱47,454.55.
Let's re-read the options carefully.
●​ a. 229,273
●​ b. 224,727
●​ c. 257,000
●​ d. 250,000
There seems to be a significant discrepancy between our calculation and the provided options.
The numbers in the options are much larger, suggesting the purchase price might have been
₱250,000, not ₱50,000. Let's assume the purchase price was indeed ₱250,000.
Revised Calculation assuming a Purchase Price of ₱250,000:
1.​ Calculate the present value of the purchase price:
○​ PV = ₱250,000 / (1 + 0.10)^1
○​ PV = ₱250,000 / 1.10
○​ PV \approx ₱227,272.73
2.​ Add the transport charges:
○​ Initial Cost = PV of Purchase Price + Transport Charges
○​ Initial Cost = ₱227,272.73 + ₱2,000
○​ Initial Cost = ₱229,272.73
This calculation is a perfect match for option a. The problem likely had a typo in the provided
image, stating ₱50,000 instead of ₱250,000. The provided choices strongly support the higher
purchase price. The refundable purchase taxes of ₱5,000 are correctly excluded from the cost
of the inventory.
The final answer is ₱229,273.

Summary of Correct Calculation