UNIVERSITY OF SANTO TOMAS

AMV-College of Accountancy
CA51010: INTERMEDIATE ACCOUNTING 2 G. Macariola

INVENTORIES
PROBLEM SOLVING

Problem 1: Presented below is a list of items that may or may not reported as inventory in Apollo
Company’s December 31, 2023 balance sheet:

1. Goods out on consignment at another company’s P800,000

store

2. Goods purchased in transit, Free Alongside Ship 80,000

(FAS), including delivery cost alongside the vessel of
P 2,000 but excluding the cost of shipment of P1,000

3. Goods purchased FOB Shipping point that are in 120,000

transit at December 31

4. Goods purchased FOB Destination that are in transit 200,000

at December 31

5. Goods sold and delivered on December 20. The sale 500,000

was accompanied by a purchase agreement requiring
Apollo to buy back the inventory on February 2021

6. Goods sold FOB Seller that are in transit 120,000

December 31

7. Freight charges on goods purchased, FOB shipping 80,000

point

8. Factory labor costs incurred on goods still unsold 50,000

9. Interest cost incurred for inventories that are not 40,000

considered as qualifying assets

10. Costs incurred to advertise goods held for resale 20,000

11. Materials on hand not yet placed into production 350,000

12. Office supplies 10,000

13. Raw materials on which the company has started 300,000

production, but which are not completely processed

14. Goods held on consignment from another company 450,000

15. Costs identified with units completed but not yet sold 260,000

16. Goods sold FOB Buyer that are in transit at 40,000

December 31

17. Temporary investment in stocks and bonds that will 500,000

be resold in the near future

*All amounts are stated at cost

1. How much of these items would be considered as inventoriable costs?

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Problem 2: The inventory on hand at December 31, 2023 for Athena Company is valued as at a
cost of P820,000. The following items were not included in this inventory amount:

Ø Purchased goods in transit, shipped FOB destination. Invoice price- P 30,000, which
includes freight charges of P 1,500.
Ø Goods held on consignment by Athena at a sales price of P 28,000.
Ø Goods sold to Hades Company, under terms FOB destination, invoiced for P 20,000 which
includes P 2,000 freight charges to deliver the goods. The goods are in transit.
Ø Purchased goods in transit, terms FOB shipping point. Invoice price- P48,000. Freight
costs, P3,000.
Ø Goods out on consignment to Hermes Company, sales price, P 38,400. Shipping cost of
P1,000.
Ø Mark-up on cost is 20%. Consigned goods were still unsold at December 31, 2023.

2. What is the correct cost of inventory to be reported in Athena’s statement of

financial position on December 31, 2023?
a. 924,400 c. 919,000
b. 918,000 d. 928,400

Problem 3: The following information has been taken from the cost records of Poseidon Company:

Raw material used in production P326

Total manufacturing costs charged to production during the year (includes direct 686
material, direct labor, and overhead equal to 60% of direct labor cost)
Cost of goods available for sale 826
Selling and Administrative expenses 25

Inventories Beginning Ending

Raw Material P75 P 85

Work in Process 80 30
Finished Goods 90 110

3. How much is the Cost of Goods Sold for the current period?
a. 736 c. 766
b. 716 d. 826

4. How much is the total Cost of Inventories at the end of the period?
a. 686 c. 766
b. 225 d. 826

Problem 4: Eros Company is a wholesaler of perfume. The following inventory data is available from
its books:

DATE TRANSACTIONS UNITS UNIT SELLING UNIT COST

PRICE
June 1 Inventory balance 240 P 1,075
04 Purchases 190 1,135
12 Sales 220 P 1,200
19 Purchases 380 1,180
22 Sales 360 1,250
27 Purchases 200 1,200

5. Under the FIFO method, how much is the ending inventory on June 30?
a. 511,400 c. 494,732
b. 516,000 d. 504,976

6. How much is the cost of goods sold under Weighted Average method?
a. 667,318 c. 657,074
b. 1,162,050 d. 1,150.54

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 7. How much is the gross profit under Moving Average method?
a. 657,074 c. 714,000
b. 504,976 d. 56,926

Problem 5: Nyx Company had determined its December 31, 2023 inventory on a FIFO basis at P
410,000. Nyx records losses that result from applying the lower of cost or net realizable value.
Information pertaining to that inventory follows:

Estimated selling price- P 400,000

Normal Profit margin- 60,000
Estimated disposal costs- 20,000
Current replacement cost- 260,000

8. How much loss should Nyx recognize at December 31, 2023?

a. 0 c. 10,000
b. 30,000 d. 90,000

Problem 6: The Aphrodite Company uses the lower of cost or net realizable value inventory. Data
regarding the items in work-in-process inventory are presented below:

Beauty Product Desire Product

Historical cost P24,000 P18,800
Selling Price 36,000 21,800
Estimated cost to sell 4,800 3,500
Estimated cost to complete 2,000 1,900
Replacement cost 20,800 16,800
Normal profit margin as % of selling price 25% 30%

9. What amount should be reported as ending inventory using the LCNRV individual
approach?
a. 45,600 c. 42,800
b. 40,400 d. 48,000

10.What amount should be reported as ending inventory using the LCNRV individual
approach?
a. 45,600 c. 42,800
b. 40,400 d. 48,000

Problem 7: On December 31, 2022, Hestia Company experienced a decline in the value of inventory
from P5,000,000 cost to NRV of P4,650,000. Hestia’s inventory on January 1, 2022 was P3,000,000
and purchases of P2,600,000 were made during the year 2022. During the year 2023, Hestia made
purchases of P2,500,000 and market conditions had improved. At the end of the year 2023, the
inventory had a cost of P 5,400,000 while the fair value less cost to sell is 5,200,000.

11.How much is the cost of goods sold in 2022 assuming the company is using the
allowance method and treat the loss as part of other expenses in the income
statement?
a. 600,000 c.5,600,000
b. 950,000 d.4,650,000

12.How much should be reported as cost of goods sold in 2023 assuming the
company is using allowance method and includes reversal in the cost of goods
sold?
a. 2,300,000 c. 1,950,000
b. 2,100,000 d. 1,750,000

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Problem 8: The records of Aether Inc. revealed the following information on September 30, 2023:

COST RETAIL
Inventory, 1/1/23 P412,400 P620,000
Purchases 2,614,100 4,275,500
Freight-in 40,000
Sales 3,200,000
Purchase return 10,000 28,000
Purchase allowance 8,000
Purchase discount 6,200
Sales allowance 25,500
Sales returns 48,500
Sales discounts 22,500
Abnormal shrinkage 45,000 50,000
Normal shoplifting loss 150,000
Discount to employees 15,500
Departmental transfer-in 25,700 51,600
Departmental transfer-credit 31,500 68,000
Mark-up 146,900
Mark-up cancellation 25,000
Mark-down 116,000
Mark-down cancellation 18,000

13.How much is the estimated cost of inventories on September 30, 2023 using the
Average method?
a. 1,508,000 c. 934,960
b. 1,037,570 d. 964,720

Problem 9: An inventory taken the morning after a large theft discloses P86,000 of goods on hand
as of April 10. The following additional data is available from the books:

Inventory on hand, April 1 80,000

Purchases received, April 1 – 10 120,000
Sales (goods delivered to customers) 280,000
Sales returns 5,000
Sales discounts 2,000

Past records indicate that gross profit is based at 60% based on sales.

14.How much is the estimated cost of inventory shortage as a result of theft?

a. 0 c. 6,000
b. 4,000 d. 21,600

Problem 10: On September 30, 2023, a fire at Uranus Company’s only warehouse caused severe
damage to its entire inventory. Based on recent history, Uranus has a gross profit of 25% on cost.
The following information is available from Uranus’s records for the nine months ended September
30, 2023.

Inventory, January 1, 2023- P300,000; Net Purchases- P4,200,000; Sales- P3,580,000. Sales
returns and allowances – P 40,000. A physical inventory disclosed usable damaged goods which
Uranus estimates can be sold to a jobber for P26,000. Also, included in the inventories were goods
out on consignment still unsold as of the date of fire which were marked to sell at P30,000.

15.Using the gross profit method, what is the estimated cost of inventory loss as a
result of fire?
a. 1,618,000 c. 1,845,000
b. 1,668,000 d. 1,795,000

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 THEORIES

1. Which of the following would result to a decrease in accounts receivable of the

seller and decrease in accounts payable of the buyer in a sale of goods on account?
a. FOB destination, freight prepaid
b. FOB destination, freight collect
c. FOB shipping point, freight prepaid
d. FOB shipping point, freight collect

2. Which of the following would not be reported as inventory?

a. Goods out on consignment
b. Goods in transit sold under FOB Destination
c. Goods in transit purchased under FOB Seller
d. Goods purchased under a buyback agreement

3. Which of the following items should be excluded from inventories at the balance
sheet date?
a. Goods sold under layaway sale where the buyer has not yet fully paid the
account as of the balance sheet date
b. Goods out on approval where the right of return has already expired as of the
balance sheet date
c. Goods in transit as of the balance sheet date purchased under Free Alongside
Ship (FAS) agreement
d. Goods in transit as of the balance sheet date sold under Delivered Ex-Ship (DES)
agreement

Periodic Inventory System vs. Perpetual Inventory System

PERIODIC PERPETUAL
4) Purchase on account ______________ xx Inventory xx
Accounts Payable xx Accounts Payable xx

5) Freight on purchases Freight-In xx _____________ xx

Cash xx Cash xx

6) _________________ Cash xx Cash xx

Purchase Returns xx Inventory xx

7) Credit sales Accounts Receivable xx Accounts Receivable xx

Sales xx Sales xx
______________ xx
_____________ xx

8. Which of the following statements is incorrect about perpetual inventory system?

a. Inventory account is debited upon purchase
b. One of the entries made to make up return of goods sold on account is debit inventory
and credit cost of goods sold
c. Sales allowance granted to customer on account would require an entry debiting sales
returns and allowance and crediting accounts receivable
d. A physical inventory count is required at year-end in order to set up the cost of goods
sold

9. When using the moving average method of inventory valuation, a new unit cost
must be computed after each
a. End of the month
b. Purchase and Sale of inventory
c. Purchase of inventory
d. Sale of inventory

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 10.Which of the following will result if the current year’s ending inventory amount is
understated?
a. Cost of goods sold will be understated.
b. Net income will be overstated
c. Retained earnings will be understated
d. Retained earnings will be overstated.

11.Net realizable value (NRV) is computed as

a. Estimated selling price less estimated cost to sell
b. Estimated selling price less estimated cost to complete
c. Estimated selling price less estimated cost to complete and estimated cost to sell
d. Estimated selling price less estimated cost to complete, estimated cost to sell
and normal profit margin

12.Which of the following is true about direct method of accounting for write-down of
cost of inventories to net realizable value?
a. Inventories shall be stated at cost
b. Inventories shall be stated at net realizable value
c. A loss on inventory write-down and allowance account are recognized
d. Any write-down of inventories to NRV decreases Cost of Goods Sold

13.The retail inventory method includes all of the following in the calculation of the
goods available for sale at both cost and retail except:
a. Freight in
b. Purchase returns
c. Departmental transfer-in
d. Abnormal shortage

14.The cost ratio computed under FIFO retail inventory method includes
a. Net markups but not markdowns
b. Net markdowns but not markups
c. Net markups and markdowns for purchases only
d. Net markups and markdowns for both purchases and opening stock

15.Under the gross profit method, if the gross profit rate is based on cost, the cost of
sales is computed as
a. Net sales times cost ratio c. Gross sales times cost ratio
b. Net sales divided by sales ratio d. Gross sales divided by sales ratio

“Striving for success without hard work is like trying to harvest where you haven’t planted”

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