FINANCIAL ACCOUNTING 1 - Inventories PDF

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####### Institute of Accounts. Business and Finance####### Department of Accountancy and Internal AuditingINTERMEDIATE ACCOUNTING 1 DO-IT-YOURSELF EXERCISESTABLE OF CONTENTS####### Institute of Accounts. Business and Finance####### Department of Accountancy and Internal Auditing####### EXERCISE 2-##...

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Far Eastern University Institute of Accounts. Business and Finance Department of Accountancy and Internal Auditing

INTERMEDIATE ACCOUNTING 1 DO-IT-YOURSELF EXERCISES TABLE OF CONTENTS

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Far Eastern University Institute of Accounts. Business and Finance Department of Accountancy and Internal Auditing

EXERCISE 2.3-1 Inventoriable Costs Exercise 2.3-1A (I (Inventoriable nventoriable Costs) (Adapted from Auditin Auditing gT Textbook) extbook)

The costs set out below are those typically incurred by manufacturing businesses. Under column (3), write YES if the given cost is inventoriable and NO if not. If the answer is YES, write the amount of inventoriable costs under column (4).

No.

1. 2.

3. 4.

5. 6. 7. 8. 9. 10.

Items

Supplier’s gross price for raw materials, P 150,000 Materials purchased from another supplier on extended credit amounting to P 570,000. The price to be paid under normal credit term is P 550,000. Invoice price of raw materials purchased amounting to P 180,000. Quantity discounts of 10, 5 are allowed by supplier. Materials purchased from a supplier amounting to P 616,000, inclusive of 12% VAT. The company is VAT registered and can claim this as an input VAT. Materials purchased from a supplier amounting to P 515,000, inclusive of nonrecoverable purchase tax of P 15,000. Cost of transporting raw materials to the business premises, P 5,000. Import duties to authorities on import of raw materials to be used during the manufacturing process, P 25,000. Labor cost directly incurred in the processing of raw materials, P 420,000 Normal amount of wasted labor, P 57,000 Abnormal amount of wasted labor, P 69,000

Inventori Inventoriable? able? (column 3) YES YES

Amount (column 4) 150,000 550,000

YES

180,000

YES

550,000

YES

515,000

YES

5,000

YES

25,000

YES YES NO

420,000 57,000 -

Exercise 2.3-1B (I (Inventoriable nventoriable Costs) (Adapted from Auditin Auditing gT Textbook) extbook)

The costs set out below are those typically incurred by manufacturing businesses. Under column (3), write YES is the given cost is inventoriable and NO if not. If the answer is YES, write the amount of inventoriable costs under column (4).

No.

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16.

Items

Cost of transporting goods to customers on sale, P 2,500. Non-recoverable purchase taxes charged to customers on sale, P 12,000 Non-recoverable sales taxes, P 14,440. Commission payable to salesmen on the sale of the goods, P 14,500. Provision for bad and doubtful debts in relation to trade receivable, P 56,000. Costs of the accounts department, P 140,000 Head office costs relating to the overall management of the business, P 234,000. Borrowing cost incurred on inventories that takes substantial amount of time to create, P 122,000. Storage cost for a manufacturing product, P 56,000 Selling costs, P 45,600. Non-production overhead costs of designing products for a specific customer, P 10,000. Storage cost of finished goods, P 23,000 Fixed administration costs/overheads (rent of office), P 450,000 Insurance on in-transit inventories, p 17,800 Freight incurred when the inventories were returned and redelivered, P 34,100 Foreign exchange differences arising directly on the recent acquisition of

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Inventoriabl Inventoriable? e? (column 3) NO NO NO NO

Amount (column 4) -

NO NO

-

NO

-

YES

122,000

YES NO

56,000

YES

10,000

NO NO YES

17,800

NO NO

-

Far Eastern University Institute of Accounts. Business and Finance Department of Accountancy and Internal Auditing

inventories invoiced in a foreign currency. The peso equivalent when acquired is P 567,000 and the peso equivalent of the merchandise when paid is P 577,000.

Exercise 2.3-1C (R (Related elated Multiple-Choice Questions) In relation to the above, answer the following multiple-choice questions. Write your answer on the space provided before each number. Use only CAPITAL LETTERS. A

1.

What inventory account is generally applied to goods held by a trading concern? A. Merchandise inventory B. Raw materials inventory C. Goods in process inventory D. Finished goods inventory

B

2.

Which is part of inventory cost? A. Freight charge on goods sold B. Freight charge on goods consigned C. Excessive spoilage D. Selling cost

D

3.

Inventories are assets (choose the incorrect one) A. Held for sale in the ordinary course of business. B. In the process of production for sale C. In the form of materials or supplies to be consumed in the production process or in the rendering of services. D. Held for use in the production or supply of goods or services.

D

4.

Inventories encompasses all of the following, except: A. Materials and supplies awaiting use in the production process B. Work in process C. Goods purchased with the intention to resell D. Land and other property not held for sale

C

5.

The cost of inventories shall comprise all of the following, except: A. Cost of purchase B. Labor cost and production overhead C. Abnormal amount of wasted materials D. Other cost incurred in bringing the inventories to their present location and condition

D

6.

The cost of purchase price does not include A. Handling costs directly attributable to the acquisition of goods B. Purchase price C. Import duties and taxes D. Discounts to encourage customers to purchase in bulk or in volume

C

7.

The cost of conversion of inventories include all of the following, except: A. Direct labor B. Indirect materials C. Salaries of the president of the company D. Indirect labor

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Far Eastern University Institute of Accounts. Business and Finance Department of Accountancy and Internal Auditing

EXERCISE 2.3-2 Inventory Composition at Year-end Exercise 2.3-2A (Computation of Correct Amount of Inve Inventory) ntory) (Adapted from Intermediate Acco Accounting unting T Textbook) extbook)

Amiable Company provided the following data at year end: Items Items Items Items Items Items Items Items Items Items Items Items

counted in the bodega included in the count specifically segregated per sales contract in receiving department, returned by customer, in good condition ordered and in the receiving department, invoice not received ordered, invoice received but goods not received. Freight is paid by the seller shipped today, invoice mailed, FOB shipping point shipped today, invoice mailed, FOB destination currently being used for window display on counter for sale in receiving department, refused by us because of damage included in count, damaged and unsalable in the shipping department

4,000,000 100,000 50,000 400,000 300,000 250,000 150,000 200,000 800,000 180,000 50,000 250,000

Required: Compute the correct amount of inventory. SOLUTION:

Items Items counted in the bodega Items included in the count specifically segregated per sales contract Items in receiving department, returned by customer, in good condition Items ordered and in the receiving department, invoice not received Items ordered, invoice received but goods not received. Freight is paid by the seller Items shipped today, invoice mailed, FOB

shipping point

Amount 4,000,000

Included 4,000,000

100,000

(100,000)

50,000

50,000

400,000

400,000

300,000

-

250,000

Items shipped today, invoice mailed, FOB

destination Items currently being used for window display Items on counter for sale Items in receiving department, refused by us because of damage Items included in count, damaged and unsalable Items in the shipping department

Correct amount of inventory

Exercise 2.3-2B (Computation of Cor Correct rect Amount of Inven Inventory) tory) (Adapted from Intermediate Acco Accounting unting T Textbook) extbook)

Natal Company provided the following information:

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150,000 200,000 800,000

150,000 200,000 800,000

180,000 50,000

(50,000)

250,000

250,000

5,700,000

Far Eastern University Institute of Accounts. Business and Finance Department of Accountancy and Internal Auditing

Materials Advances for materials ordered Goods in process Unexpired insurance on inventories Advertising catalogs and shipping cartons Finished goods in factory Finished goods in company-owned retail store, including 50% profit on cost Finished goods in hands of consignee including 40% profit on sales Finished goods in transit to customers, shipped FOB destination, at cost Finished goods out on approval, at cost Unsalable finished goods, at cost Office supplies Materials in transit shipped FOB shipping point, excluding freight of P 30,000 Goods held on consignment, at sales price, cost P 150,000

1,400,000 200,000 650,000 60,000 150,000 2,000,000 750,000 400,000 250,000 100,000 50,000 40,000 330,000 200,000

Required: Compute the correct amount of inventory.

SOLUTION:

Items Materials Advances for materials ordered Goods in process Unexpired insurance on inventories Advertising catalogs and shipping cartons Finished goods in factory Finished goods in company-owned retail store, including 50% profit on cost Finished goods in hands of consignee including 40% profit on sales Finished goods in transit to customers, shipped FOB destination, at cost Finished goods out on approval, at cost Unsalable finished goods, at cost Office supplies Materials in transit shipped FOB shipping point, excluding freight of P 30,000

Goods held on consignment, at sales price, cost P 150,000 Correct amount of inventory

Amount 1,400,000 200,000 650,000 60,000 150,000 2,000,000

Included 1,400,000

750,000

500,000

400,000

240,000

250,000 100,000 50,000 40,000

250,000 100,000

330,000

360,000

650,000

2,000,000

200,000 5,500,000

Exercise 2.3-2C (R (Related elated Multiple-Choice Questions) In relation to the above, answer the following multiple-choice questions. Write your answer on the space provided before each number. Use only CAPITAL LETTERS.

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Far Eastern University Institute of Accounts. Business and Finance Department of Accountancy and Internal Auditing

D

1.

Which of the following would not be reported as inventory? A. Land acquired for resale by a real estate firm. B. Shares of stocks held for resale by a brokerage firm C. Partially completed goods held by a manufacturing company D. Machinery acquired by a manufacturing company for use in the production process.

B

2.

Which of the following describes the flow of product costs through the inventory accounts of a manufacturer? A. Raw materials, goods in process, factory overhead, finished goods B. Raw materials, goods in process, finished goods C. Raw materials, direct labor, factory overhead, finished goods D. Raw materials, direct labor, factory overhead

A

3.

Merchandise shipped FOB shipping point on the last day of the year should ordinarily be included in the inventory balance of the A. The buyer’s inventory balance B. The seller’s inventory balance C. Neither the buyer’s nor the seller’s inventory balance D. Both the buyer’s and the seller’s inventory balance

A

4.

If goods shipped FOB destination are in transit at the end of the year, they should be included in the inventory balance of the A. Seller B. Common carrier C. Buyer D. bank

C

5.

Which of the following costs of conversion cannot be included in the cost of inventory? A. Salaries of factory supervisor B. Depreciation of machinery sued in production C. Salaries of sales staff in which the sales department shares the building with the production department D. Indirect materials

EXERCISE 2.3-3 Accounting Inventory System 6|Page

Far Eastern University Institute of Accounts. Business and Finance Department of Accountancy and Internal Auditing

Exercise 2.3-3A (J (Journal ournal Entries using the T Two wo Accounting Inventory Methods of R Recording) ecording) Rainy Days Company is a wholesaler of high-quality raincoat. At January 1 of the current year, the entity’s inventory consisted of 900 raincoats priced at P 100 each. During the current year, the following events occurred: 1. 2. 3. 4. 5. 6. 7.

Purchased 8,000 raincoats on credit from Happy Days Corporation at P 100 each. Returned to suppliers 500 defective raincoats and received credit memorandum. Partially paid 6,000 of the raincoats purchased. Sold 7,900 raincoats on credit to various customers at P 200 each. Received 200 raincoats returned by various customer and issued credit memoranda. These goods were in excellent condition. Collected cash from various customers for 6,800 of the raincoats sold. At December 31, the physical count of raincoats revealed 600 units were on hand.

Required: 1. Journal entries, including adjustments to record the above transactions using the periodic and perpetual system. 2. Prepare partial statement of comprehensive income for the year ended.

SOLUTION: Requirement 1 – Journal entries, including adjustments PERIODIC SYSTEM No.

Transactions

Partic Particulars ulars

1

Purchased 8,000 raincoats on credit from Happy Days Corporation at P 100 each.

Purchases Accounts Pay. (8,000 x P 100)

2

Returned to suppliers defective raincoats and received credit memorandum.

Accounts Payable PRA (500 x P 100)

3

Partially paid 6,000 of the raincoats purchased.

Accounts Payable Cash (6,000 x P 100)

Sold 7,900 raincoats on credit to various customers at P 200 each.

Accounts Receivable

4

Dr Dr..

PERPETUAL SYSTEM Cr Cr..

Partic Particulars ulars

Dr Dr..

Cr Cr..

800,000

800,000

Inventory Accounts Pay.

800,000

800, 000

50,000

50,000

Accounts Payable Inventory

50,000

50,000

Accounts Payable Cash

600,000

600,000 600,000

Accounts Receivable

1,580,000

Sales

600, 000 1,580 ,00 0

Sales 1,580 ,00 0

(7,900 x P 200)

Cost of Sales

790,000

Inventory (7,900 x P 100) 5

6

7

Received 200 raincoats returned by various customer and issued credit memoranda. These goods were in excellent condition.

SRA Accounts Rec. (200 x P 200)

Collected cash from various customers for 6,800 of the raincoats sold.

Cash

40,000

40,000

Accounts Rec.

1,360 ,00 0

(6,800 x P 200)

40,000

40,000

Inventory Cost of Sales (200 x P 100)

20,000

20,000

Accounts Rec.

At December 31, the Inventory, ending Income Summary (600 x P 100)

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NO ENTRY

60,0,00 60,000

790, 000

SRA Accounts Rec.

Cash

1,360,000

1,580, 000

1,360 ,00 0

1,360, 000

Far Eastern University Institute of Accounts. Business and Finance Department of Accountancy and Internal Auditing

physical count of raincoats revealed 600 units were on hand. Inventory shortage adjustment

8

NO ENTRY

Cost of Sales Inventory

10,00 0

Inventory, per book Beginning bal.

Units

(900 x P 100) Purchases Purchase return Sales Sales return PER BOOK-OVER

10,000 Peso

900

90,000

8,00 0 (50 0) (7,90 0) 200

800,000 (50,000) (790,0 00) 20,000

700

70,0 00 60,0 00 10,0 00

PER COUNT (600 x P100) SHORTAGE

600 100

Requirement 2 – Partial Statement of Comprehensive Income PERIODIC SYSTEM

PERPETUAL SYSTEM

Revenue from Sales: Sales Sales Returns

1,580,000 (40,000)

Net Sales

1,540,000

Cost of Sales: Inventory, beginning Purchases Purchase Returns GAFS Inventory, ending Gross Profit

90,000 800, 000 (50,0 00) 840,000 (60,000)

Revenue from Sales: Sales Sales Returns Net Sales Cost of Sales Gross Profit

1,580, 000 (40,00 0) 1,540,000 (780,000) 760,000

(780,000) 760,000 *COS = P 790,000 – P 20,000 + P 10,000 = P 780,000

Exercise 2.3-3B (R (Related elated Multiple-Choice Questions) In relation to the above, answer the following multiple-choice questions. Write your answer on the space provided before each number. Use only CAPITAL LETTERS. C

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1.

Which is the method of accounting for inventories in which the cost of goods sold is recorded each time a sale is made? A. Professional inventory system

Far Eastern University Institute of Accounts. Business and Finance Department of Accountancy and Internal Auditing

B. Periodic inventory system C. Perpetual inventory system D. Planned inventory system D

2.

An entity returned merchandise purchased on account. Under the perpetual inventory system, the account to be credited in the journal entry to record the return is A. Purchases B. Purchase Returns C. Purchase allowances D. Inventory

D

3.

Which of the following is false of the perpetual inventory system? 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. C. 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.

C

4.

An entry debiting inventory and crediting cost of goods sold would be made when A. Merchandise is sold and the periodic inventory method is sued. B. Merchandise is sold and the perpetual inventory method is used. C. Merchandise is returned and the perpetual inventory method is used. D. Merchandise is returned and the periodic inventory method is used.

C

5.

Which of the following accounts is not used by the perpetual inventory system? A. Sales B. Cost of Goods sold C. Inventory, beginning D. Sales Discount

EXERCISE 2.3-4 Recording of Purchases – Gross Method and Net Method Exercise 2.3-4A (R (Recording ecording Purchases R Related elated T Transactions ransactions Using the Gross Method a and nd Net Method) OHYES Corporation purchased P 120,000 of merchandise ...