Inventory Problems and Theories (Answer Key PDF

Preview

Summary

Problems on Inventory On January 2,2019, Vice Company purchased goods from Anne Company, a company in Singapore for an invoice amount of S$100,000 if paid within the normal credit period of 10 days. However, payment maybe deferred up to 3 months subject to a revised invoice in the amount of S$102,00...

Description

Problems on Inventory 1. On January 2,2019, Vice Company purchased goods from Anne Company, a company in Singapore for an invoice amount of S$100,000 if paid within the normal credit period of 10 days. However, payment maybe deferred up to 3 months subject to a revised invoice in the amount of S$102,000. On January 2,2019 the exchange rate was P34.00 to S$1.00. Import duties, P500,000; transport charges, P300,000 and insurance, P100,000. Vice Company paid the invoice amount on April 1, 2019 on this date the exchange rate was P35.00 to S$1.00. What amount should the goods be initially recorded? ANSWER: P4,300,000 Solution: Invoice amount (100k x 34)

3,400,000

Import duties Transport charges

500,000

Insurance

100,000

300,000

TOTAL

P4,300,000

Journal entries: Inventory (100k x 34) Discount on note payable Note payable (102k x 34)

3,400,000 68,000 3,468,000

The inventory shall be recorded using the invoice amount within the normal credit period. Remember that interest expense and FOREX loss arising from a purchase of inventory under deferred payment terms shall not be included as inventory. Inventory 900,000 Cash 900,000 To record inventoriable cost: import duties, transport charges, and insurance Upon payment of note: Note Payable Interest expense Foreign exchange loss [102,000 x (35-3400] Cash (102k x 35) Discount on Note Payable

3,468,000 68,000 102,000 3,570,000 68,000

2. On December 10, 2019, Beauty Company purchase goods with and invoice price of P200,000. The terms were FOB shipping point. Some of the costs incurred in connection with the sale and delivery of the goods were as follows: Packaging for shipment P2,000; Shipping, P3,000 and special

handling charges, P4,000. On Dec. 15, 2019, Beauty Company received a P5,000 rebate in relation to the above purchases. In the December 31,2019 statement of financial position, what amount of these goods should be included in inventory? ANSWER: P204,000 Solution: Invoice amount

200,000

Packaging

2,000

Shipping

3,000

Special handling chares

4,000

Less: Rebate TOTAL

(5,000) P204,000

3. On January 1, 2019 the entity purchased raw materials to be consumed in the production process for P550,000, including P50,000 refundable purchase taxes. The purchase price was funded by raising a loan of P555,000 (including P5,000 loan-raising fees). The loan is secured by the inventories. During January 2019 the entity designed the corporate gifts for the customer, the design costs included: Cost of external designer, P7,000 and labor cost, P3,000 . During the February 2019, the entity’s production team developed the manufacturing technique and made further modifications necessary to bring the inventories to the conditions specified in the agreement. The following costs were incurred in the testing phase; Material, net of P3,000 recovered from the sale of the scrapped output, P21,000; Labor, P11,000 and depreciation of plant used to perform the modifications, P5,000. During February 2019 the entity incurred the following additional costs in manufacturing the customized corporate gifts; consumable stores, P55,000; labor, P65,000 and depreciation of plant used to perform the modifications, P15,000. The customized gifts were ready for sale on March 1,2019. No abnormal wastage occurred in the development and manufacture of the corporate gifts. What is the cost of the finished inventory of customized gifts? ANSWER: P682,000 Solution: Invoice amount (exclude refundable purchase

500,000

taxes and loan-raising fees)

Cost of external designer Labor cost

7,000 3,000

Materials – testing phase Labor – testing phase

21,000 11,000

Depreciation – testing Consumable stores

5,000 55,000

Labor Depreciation

65,000 15,000

TOTAL INVENTORIABLE COST

P682,000

4. Lebron Company uses the perpetual system for its merchandise inventory. The accounting records show a P500,000 balance in the inventory account as December 15,2019. The following information pertaining to its inward inventory transactions from December 16 to 31: Merchandise received through consignment Inventory purchased with a buyback agreement Inventory purchased but still in transit, FOB, shipping point, excluding P5,000 freight cost Inventory purchased still in transit, Free Alongside, including delivery cost alongside the Vessel of P6,000 but excluding the cost of shipment of P3,000 Inventory purchased still in transit, CIF (excluding insurance costs and freight of P8,000).

20,000 100,000 155,000 250,000 175,000

What amount should Lebron Company report as value of its inventory in its 2019 balance sheet? ANSWER: 1,090,000 Solution: Inventory balance – December 15………………………………………………………………….500,000 Inventory in transit, FOB Shipping point (add back 5,000)………………………………………..160,000 Inventory in transit, FAS (exclude delivery cost alongside vessel of 6,000 and include cost of shipment of 3,000)………………247,000 Inventory in transit, CIF (include cost and freight of 8,000)……………………………………….183,000 VALUE OF INVENTORY, 12/31 (500K + 160k + 247K + 183K)……………………………1,090,000

Notes: Merchandise received through consignment (EXCLUDED) Inventory purchased with a buyback (EXCLUDED) 5. On December 1, 2019, Wham Company consigned 50 freezers at a unit cost of P15,000 to Beatles Company for sale at P20,000 each and paid P20,000 in transportation cost. On December 31, 2019, Beatles reported the sale of the 25 freezers and returned 10 units. Cost paid by the consignee on the returned units was P4,000. Amount due to consignor was remitted on the same date. Commission rate as agreed upon was 15%. What amount of inventory on consignment and net income related to the sold units, respectively, should Wham report on December 31, 2019? ANSWER: P231,000 and P32,000 Transportation cost paid by consignor on delivering the inventory to consignee is inventoriable. To get the unit cost of each inventory consigned… Total cost of goods [(50 x 15,000) + 20,000] 770,000 Divide by: Total units of goods consigned 50 Unit cost of each good consigned 15,400 per unit Inventory: Ending inventory (50 freezers consigned less 25 units sold less 10 units returned= 15 units left) 15 units x 15,400 = 231,000

Net income from consignment: Sales (25 freezers sold x 20,000 each)………………………………………500,000 Less: COGS (25 freezers sold x 15,400)……………………………………(385,000) Cost paid by consignee on units returned (this is charged against the consignor when consignee remits cash collections)………………………….(4,000) Freight paid on units returned [(10/50) x 20,000]……………………(4,000) Consignee’s commission (15% of sales of 500k)……………………(75,000) Net income 32,000 Note: Freight paid by the consignor for delivery of goods to consignee will be expensed for a portion of the units returned by the consignee over total units consigned. Consignment accounting will be discussed in more detail under Advanced Accounting. However, it is useful to study it NOW.

6.

On December 1, 2019, Looney Store received 1,000 units of windbreakers on consignment from Tune Co. Tune’s cost for the windbreakers was P1,600 each, and they were priced to sell at P2,000. Transportation cost of P2,000 was paid by Looney. As of December 31, 50 units where returned to the consignor and 200 units are still held by the consignee. Commission rate as agreed upon between contracting parties was 12% on all sales to be made by Tune Co. In its December 31, 2019 balance sheet, what amount should Looney report as payable for consigned goods? ANSWER: P1,318,000 Solution: Sales made by Looney (1k consigned – 50 returned – 200 remaining = 750 units sold ; 750 x 2k)…………….1,500,000 Less: Transportation cost shouldered by Looney (consignor shall bear transportation cost to consignee)…….......(2,000) Commission of Looney (15% x 1.5M)…………………………………………………………………… (180,000) Net Payable by Looney (Net Cash Remittance in the Future)………………………………………. 1,318,000

7. The following information was derived from the 2019 accounting records of Perez Co.: Perez’s Goods Perez’s Central Warehouse Held by Consignees Beginning Inventory P130,000 P14,000 Purchases 575,000 70,000 Freight-in 10,000 Transportation to consignees 5,000 Freight-out 30,000 8,000 Ending Inventory 145,000 20,000 Perez’s 2019 cost of sales was ANSWER: P639,000 Solution: For the central warehouse: 130k (beg. Inv) + 575k purchases + 10k freight in - 145k ending inventory = 570k cost of sales from central warehouse For those held by consignee: 14k (beg. Inv) + 70k purchases + 5k transportation cost to consignee – 20k ending inventory = 69k cost of sales from goods held by consignee Total cost of sales: 570,000 from central warehouse + 69,000 from the consignees = P639,000

Note that transportation costs of delivering goods from consignor to consignee is an inventoriable cost of the consignor. The consignor shall also bear the same. 8. On June 1, 2019 Concept Corp. sold merchandise with a list price of P200,000 to Randall on account. Concept allowed trade discounts of 30%, 20% and 10%. Credit terms was 2/15, n/40 and the sale was made FOB shipping point. Concept prepaid P4,000 of delivery cost for Randall as an accommodation. On June 3,2019, Concept received from Randall returned merchandise with an invoice price of P50,000 due to minor defects. On June 14, 2019, Randall settled its account in full to Concept. How much net cash remittance did Concept received? ANSWER: P53,784 Journal Entries: Accounts Receivable (200k x 70% x 80% x 90%) 100,800 Sales To record the credit sale to Randall.

100,800

*Trade discount shall be deducted to the list price to come up with the invoice price. Invoice price = List price x (1 – Trade Discount %) x (1 – Trade Discount %)…and so on and so forth depending on the given sequence of credit terms.

Accounts Receivable Cash To record the prepaid freight.

4,000 4,000

*Note that if the term is FOB shipping point and the freight is prepaid by the seller (also called Freight Prepaid), the freight paid by the seller is added as a receivable from the buyer.

Sales returns and allowances Accounts receivable To record the sales return.

50,000 50,000

Cash 53,784 Sales discount [(100,800 – 50,000) x 2%] 1,016 Accounts Receivable (100,800 – 50,000 + 4k) To record the collection of A/R within the discount period.

54,800

*Note that there is no discount pertaining to the freight prepaid by the seller. The sales discount is only based on the net sales (sales less sales returns) prior to collection.

9. Winsor Co. records purchases at net amounts. On May 5 Winsor purchased merchandise on account, P640,000, terms 2/10, n/30. Winsor returned P48,000 of the May 5 purchase and received credit on account. At May 31 the balance had not been paid. By how much should the account payable be adjusted on May 31? ANSWER:P11,840 Solution:

Net purchases at gross amount (640k – 48k)…………..592,000 Multiply by: 2% discount 2% Purchase discounts lost 11,840 Journal Entries: Purchases 627,200 Accounts payable 627,200 To record purchases at net method. Accounts payable (48k x 92%) 47,040 Purchase returns & allowances 47,040 To record the purchase returns at net method. Purchase discounts lost 11,840 Accounts payable 11,840 To record purchase discounts lost 10. Fortune Company had 10,000 units of product A on hand at December 1, 2019, consisting P40 each. Purchases of product A during the month of January were as follows: Units Unit Cost Cost December 10 12,000 P42 P504,000 18 15,000 43 645,000 22 10,000 44 440,000 27 5,000 45 225,000 29 8,000 46 368,000 A physical count on December 31, 2019 shows 16,000 units of Product A on hand. What is the cost of the inventory at December 31, 2019 under the FIFO method? ANSWER: P725,000 Solution: Note that 16,000 units at ending inventory will be priced based on the latest prices of purchases. In FIFO, the first units at beginning inventory and purchases will be considered as first sold. Hence, December 29 purchase 8,000 x 46 = 368,000 December 27 purchase 5,000 x 45 = 225,00 December 22 purchase 3,000 x 44 = 132,000 Total cost of ending inventory 725,000

11. During January 2019 Forlorn Company recorded the following information pertaining to its inventory: Units Unit cost Total cost 20,000 P10 P200,000 January 1 balance 15,000 January 15 sales 11 220,000 20,000 January 18 purchase 12 180,000 15,000 January 20 Purchase 24,000 January 25 sales 14,000 15 210,000 January 30 purchases 10,000 January 31 sales Question 1: Using the First-In First-Out method, what amount of inventory should Forlorn Company report in its January 31, 2019 statement of financial position? ANSWER: P282,000 To compute for the units in ending inventory, we just add the beginning balances and purchases and deduct any sales. Purchase returns will be deducted while sales returns will be added. Hence, Ending inventory units = 20k – 15k + 20k + 15k – 24k +14k – 10k = 20 units Using the FIFO method, ending inventory units will be based on latest prices of goods purchased. January 30 purchases 14,000 x 15 = 210,000 January 20 purchases 6,000 x 12 = 72,000 Total cost of ending inventory 282,000 Question 2: Using the moving average method, what amount of inventory should Forlorn Company report in its January 31, 2019 statement of financial position? ANSWER: P260,000 Balance Sale Purchase Purchase Sale Purchase Sale Ending Inventory

Units 20,000 (15,000) 20,000 25,000 15,000 40,000 (24,000) 14,000 30,000 (10,000) 20,000

Unit cost 10 10 11 10.80 12 11.25 11.25 15 13 13 13

Total Cost 200,000 (150,000) 220,000 270,000 180,000 450,000 (270,000) 210,000 390,000 (130,000) 260,000

12. The following information pertains to Joy Company, seller of recliners for the year ended December 31,2019 Units Unit Cost Total Cost 200 P3,000 P600,000 January 1 Inventory on hand 300 3,200 960,000 April 3 Purchase 300 3,300 990,000 July 1 Purchase 200 3,400 680,000 October 1 Purchase 200 3,500 700,000 December 26 Purchase 1,200 P3,930,000 Total The company sold 400 recliners on June 25 and 500 on December 10. What is the weighted average cost of the inventory on December 31, 2019? ANSWER: P982,500 Weighted Average Unit Cost = 3,930,000 / 1,200 = 3,275 Ending inventory at units = 1,200 units available for sale less 900 units sold = 300 units ending Ending inventory, cost = 300 x 3,275 = 982,500 13. Oslo Corporation has two products in its work in process ending inventory, each accounted for at the lower of cost or net realizable value. Specific data with respect to each product follows: Product #1 Product #2 Selling price P60 P130 Historical cost 40 70 Cost to sell 10 26 Cost to complete 15 40

In pricing its ending inventory using the lower-of-cost-or-net realizable value, what unit value should Oslo use for product #1 and #2, respectively? ANSWER: P35 and P64 Note that NRV for WIP is selling price less cost to complete less cost to sell. Product 1 NRV = 60 – 15 – 10 = 35 NRV (compare to cost of 40) LCNRV = 35 Product 2 NRV = 130 – 26 – 40 = 64 NRV (compare to cost of 70) LCNRV = 64

14. JC Company’s closing inventories as of December 31, 2019 consist of three groups of inventory items and their respective costs and net realizable values (NRV) are as follows: Group 1 Group 2 Group 3 Item Cost NRV Item Cost NRV Item Cost NRV A P1,000 P1,500 D P2,000 P1,800 G P1,500 P1,200 B 2,000 2,800 E 4,000 6,000 H 2,500 2,000 C 3,000 2,600 F 3,000 4,000 I 3,000 3,400 Total P6,000 P6,900 Total P9,000 P11,800 Total P7,000 P6,600 Question 1: What is the value of the closing inventories for December 31, 2019 under the item by item basis? ANSWER: P20,600 Product A (1,000 vs 1,500) Product B (2,000 vs 2,800) Product C (3,000 vs 2,600) Product D (2,000 vs 1,800) Product E (4,000 vs 6,000) Product F (3,000 vs 4,000) Product G (1,500 vs 1,200) Product H (2,500 vs 2,000) Product I (3,000 vs 3,400) TOTAL LCNRV

1,000 2,000 2,600 1,800 4,000 3,000 1,200 2,000 3,000 20,600

Question 2: What is the value of the closing inventories for December 31, 2019 under the group for similar item basis? ANSWER: P21,600 Group 1 (6,000 vs 6,900) Group 2 (9,000 vs 11,800) Group 3 (7,000 vs 6,600) TOTAL LCNRV

6,000 9,000 6,600 21,600

15. The following information relate to an item of raw materials of Radiant Company as of June 30, 2019. Historical cost of raw materials P500,000 Replacement cost of raw materials A as at 30 June 2019 400,000 Conversion cost to finished product A (labor, P200,000 and production overhead, P100,000. Question 1: What is the value of the closing raw material A if the finished product A to be produced is expected to fetch P1,000,000?

ANSWER: P500,000 Note that raw materials shall not be written down if the finished products in which they will be incorporated will be sold at or above cost. Total cost of finished product = 500k raw materials + 200k labor + 100k overhead = 800,000 Since the finished product will be sold above cost of 800,000, the raw materials will not be written down to its current replacement cost of 400,000 (despite the fact that it is lower than the cost of 500,000). Raw materials shall be valued at historical cost of 500,000. Question 2: What is the value of the closing raw material A if the finished product A to be produced is expected to fetch P650,000? ANSWER: P400,000 As computed above, the finished product’s cost is 800,000. If it will be sold at 650,000 (below its cost), raw materials will be written down to its current replacement cost of 400,000. The raw materials will also be valued at 400,000 if the decrease in the price of materials indicates that the cost of the finished products will exceed its NRV. 16. Based on the physical inventory taken on December 31, 2017, Marian Company has an ending inventory costing P950,000 but with a fair value less cost to sell of P750,000. During the year 2018 Marian Company has yet to sell this inventory due primarily to the nature of the business. On December 31, 2018 the inventory has a fair value less cost to sell of P1,100,000. In December 31, 2018 balance sheet, what amount should the inventory be valued? ANSWER: P950,000 (LOWER BETWEEN COST OF 950,000 AND NRV OF 1,100,000)

17. The following information pertains to Box Office Company at December 31, 2018: Inventory, January 1 1,400,000 Purchases during the year 6,600,000 Inventory, December 1, cost (NRV 1,200,000 P1,000,000) Before the year 2017 application of the lower of cost or NRV rule never produced a net to write down the company’s inventory to an amount below cost. What is the cost of goods sold assuming the company applies the lower cost of cost or NRV rule using a loss account and valuation allowance account? ANSWER: P6,800,000 Loss on Inventory writedown 200,000 Allowance for Loss on Inventory Writedown To record writedown of inventory to NRV.

200,000

Beginning inventory, cost Add: Purchases Less: Ending inventory, cost COGS, cost

1,400,000 6,600,000 (1,200,000) 6,800,000

The COGS is 6,800,000. The problem stated that the loss on inventory writedown will be recorded on a LOSS ACCOUNT. 18. The opening inventory of chronic company on January 1, 2018 was P5,000,000. This amount included inventory A items which were carried at their net realizable value of P500,000, the original cost of these items was P800,000. During the current year purchases totalled P20,000,000, transportation and other directly attributable costs incurred in bringing the inventories to warehouse totalled P500,000. At year end December 31, 2018, a physical inventory count was conducted and it revealed a book amount of P7,000,000. Included in the closing inventory was P2,000,000 but the estimated realizable value was P1,2...