PA1- INVENTORIES

MULTIPLE CHOICE QUESTIONS – THEORY

1. 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 and services.

2. The costs of purchase of inventories comprise the purchase price, import duties and other
taxes (other than those subsequently recoverable by the entity from the taxing
authorities), and transport, handling and other costs directly attributable to the acquisition
of finished goods, materials and services. Trade discounts, rebates and other similar items
are deducted in determining the costs of purchase.

The costs of conversion of inventories include costs directly related to the units of
production such as direct labor. They also include a systematic allocation of fixed and
variable production overheads that are incurred in converting materials into finished
goods.
A. True, False C. False, True
B. True, True D. False, False

3. The following are costs excluded from the cost of inventories, except:
A. Abnormal amounts of wasted materials, labor or other production costs;
B. Storage costs, unless those costs are necessary in the production process before a
further production storage;
C. Administrative overheads that do not contribute to bringing inventories to their
present location and condition; and
D. Import duties

4. Which statements are incorrect regarding formulas?

A. Specific identification of cost means that specific costs are attributable to
identified inventory.
B. The FIFO formula assumes that the items of inventory that were purchased or
produced last are sold first, and consequently the items remaining in inventory at
the end of the period are those earlier purchased or produced.
C. Under the weighted average cost formula, the cost of each item is determined
from weighted average of the cost of similar items at the beginning of each period
and the cost of similar items purchased or produced during the period.
D. The average cost formula may be calculated on a periodic basis, or as each
additional shipment is received, depending upon the circumstances of the entity.
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5. When using the moving average method of inventory valuation, a new unit cost must be
computed after each
A. purchase
B. issuance from inventory
C. purchase and issuance from inventory
D. month-end

6. The retail inventory method is characterized by

A. the recording of sales at cost.
B. the recording of purchase at selling price.
C. the reporting of year-end inventory at retail in the financial statements.
D. the recording of mark-ups at retail and markdowns at cost.

7. To determine an inventory valuation that using the retail method under the average
method, the computation of the cost to retail percentage should
A. include markups but not markdowns
B. include markups and markdowns
C. include markdowns but not markups
D. exclude markups and markdowns

8. The gross profit method of estimating ending inventory may be used for all of the
following, except
A. Internal as well as external interim reports
B. Internal as well as external year-end reports
C. Estimate of inventory destroyed by fire or other casualty
D. Rough test of validity of an inventory cost determined under the periodic or
perpetual system

9. The use of the gross profit method assumes

A. the amount of gross profit is the same as in prior years
B. sales and cost of goods sold have not changed from previous years
C. inventory values have not increased from previous years
D. the relationship between selling price and cost of goods sold is similar to prior
years.

10. Which of the following is not a basic assumption of the gross profit method?
A. The beginning inventory plus the purchase equal the total goods available for sale.
B. Goods not sold must be on hand.
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C. If the sales, reduced to the cost basis, are deducted from the sum of the operating
inventory plus purchases, the result is the amount of inventory on hand.
D. The total amount of purchase and the total amount of sales remain relatively
unchanged from the comparable previous period.

11. Which of the following represents the best justification for valuing the inventories at
lower of cost and net realizable value?
A. It is easier to keep track of market value that it is to keep track of cost as market
value is available from any supplier.
B. Cost loses its relevance for the determination of cost of goods sold if the cost of
inventory has been incurred in an earlier accounting period.
C. The balance sheet valuation of inventory is most important consideration in the
preparation of financial statements.
D. The practice of writing inventories below cost to net realizable value is consistent
with the view that assets should not be carried in excess of amount expected to be
realizable from their sale or value.

12. Net realizable value of inventories may fall below cost for a number of reasons including:
I. Product obsolescence.
II. Physical deterioration of inventories.
III. An increase in the expected replacement costs of the inventory.
IV. An increase in the estimated costs of completion,
A. I, II and IV only; C. I, III and IV only;
B. II, III and IV only; D. I and II only.

13. Lower of cost or net realizable value

A. is most conservative if applied to the total inventory
B. is most conservative if applied to major categories of inventory
C. is most conservative if applied to individual items of inventory
D. must be applied to major categories for taxes

14. An example of an inventory accounting policy that should be disclosed is the

A. effect of inventory profits caused by inflation.
B. classification of inventory into raw materials, work in process, and finished
goods.
C. identification of major suppliers.
D. method used for inventory costing.

15. When a portion of the inventories has been pledged to secure the payment of
indebtedness:
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A. The fact of a portion having been pledge should be disclosed in the notes of
financial statements
B. The value of the portion pledged should be deducted from the value of the
inventories shown in the current assets section of the balance sheet.
C. The value of the portion pledged should be transferred from current assets to
noncurrent assets.
D. The value of the inventories shown in the current assets section of the balance
sheet remains the same but the fact of having pledged a portion of the inventories
should be disclosed in the financial statements or notes.

16. Which of the following is not dealt with by PAS 41 (Agriculture)?

A. The accounting for biological assets
B. The initial measurement of agricultural produce harvested from the entity’s
biological assets
C. The processing of agricultural produce after harvesting
D. The accounting treatment of government grants received in respect of biological
assets

17. Where is a long aging or maturation process after harvest, the accounting for such
products should be dealt with by
A. PAS 41
B. PAS 2, Inventories
C. PAS 16, Property, Plant, and Equipment
D. PAS 40, Investment Property

18. A biological asset is

A. Living animal only
B. Living plant only
C. Both a living animal and living plant
D. Nonexisting thing

19. The following are biological assets, except

A. Dairy cattle C. Bushes
B. Cotton D. Fruit Trees

20. It is the management by an entity of the biological transformation of living animals or

plant for sale into agricultural produce or into additional biological assets
A. Agricultural activity C. Economic activity
B. Biological activity D. Development activity
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21. The following are agricultural produce harvested from biological assets, except
A. Grapes C. Wool
B. Cotton D. Lumber

22. Generally speaking, biological assets relating to agricultural activity should be measured
using
A. Historical cost
B. Historical cost less depreciation less impairment
C. A fair value approach
D. Net realizable value

23. Which of the following values is unlikely to be used in fair value measurement?
A. Quoted market price in a market
B. The most recent market transaction price
C. The present value of the expected net cash flows from the assets
D. External independent valuation

24. Biological assets during the period of growth, degeneration, production and procreation
are measured initial recognition and every balance sheet at
A. cost
B. replacement cost
C. fair value
D. fair value less estimated point of sales

25. Which of following costs are not included in point-of-sale costs?

A. Commissions to brokers and dealers
B. Levies by regulatory agencies
C. Transfer taxes and duties
D. Transport and other costs necessary to get the assets to a market

26. A gain or loss arising on the initial recognition of a biological asset and from a change in
the fair value less estimated point of sale costs of biological asset should be included in
A. the net profit or loss for the period
B. the statement of recognized gains and losses
C. a separate revaluation reserve
D. a capital reserve within equity

27. Inventories comprising agricultural produce that an entity has harvested from its
biological assets are measured on initial recognition at
A. Fair value
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B. Net realizable value

C. Fair value less estimated point-of-sale costs at the point of harvest
D. Cost

28. Changes in fair value of a biological assets or an agricultural produce are

A. Ignored
B. Included in the determination of income of the current period
C. Included in equity
D. Included in retained earnings

29. An unconditional government grant related to a biological asset that has been measured at
fair value less point-of-sale costs should be recognized as
A. income when the grant becomes receivable
B. a deferred credit when the grant becomes receivable
C. income when the grant application has been submitted
D. deferred credit when the grant has been approved

30. Which of the following information should be disclosed under PAS 41?
A. Separate disclosure of the gain or loss relating to biological assets and agricultural
produce.
B. The aggregate gain or loss arising on the initial recognition of biological assets
and agricultural produce and the change in fair value less estimated point-of-sale
costs of biological assets.
C. The total gain or loss from biological assets, agricultural produce, and from
changes in fair value less estimated point-of-sale costs of biological assets.
D. There is no requirement in the Standard to disclose separately any gains or losses

31. When there is a production cycle of more than one year, PAS 41 encourages separate of
the
A. Physical change only
B. Price change only
C. Total change in value
D. Physical change and price change
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STRAIGHT PROBLEMS

PROBLEM 1
Cyril Company included the following items under inventories:
Materials P1,400,000
Advance for materials ordered 200,000
Goods in process 650,000
Unexpired insurance on inventories 60,000
Advertising catalogs and shipping boxes 150,000
Finished goods in factory 2,000,000
Finished goods in company-owned retail stores, including50% profit on cost 750,000
Finished goods in hands of consignees including 40% profit on sales 400,000
Finished goods in transit to customers, shipped FOB destination, at cost 250,000
Finished goods out on approval, at cost 100,000
Unsalable finished goods, at cost 50,000
Office supplies 40,000
Materials in transit shipped FOB shipping point, excluding freight of P30,000 330,000
Goods held on consignment, at sales price, cost P150,000 200,000

Required:
Compute the amount to be presented as “Inventories” under current assets. Ans. P5,500,000.00

PROBLEM 2
In your audit of Jose Oliva Company, you find that a physical inventory on Dec. 31, 2014,
showed merchandise with a cost of P441,000 was on hand at that date. You also discover the
following items were all excluded from the P441,000.
1. Merchandise of P61,000 which is held by Oliva on consignment. The consignor is the
Max Suzuki Company.
2. Merchandise costing P38,000 which was shipped by Oliva F.O.B. destination to a
customer on Dec. 31, 2014. The customer was expected to receive the merchandise on
Jan. 6, 2015.
3. Merchandise costing P46,000 which was shipped by Oliva F.O.B. shipping point to a
customer on Dec. 29, 2014. The customer was scheduled to receive the merchandise on
Jan. 2, 2015.
4. Merchandise costing P83,000 shipped by a vendor F.O.B. destination on Dec. 30, 2014,
and received by Oliva on Jan. 4, 2015.
5. Merchandise costing P51,000 shipped by a vendor F.O.B. shipping point on Dec. 31,
2014, and received by Oliva on Jan. 5, 2015.
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Required:
Based on the above information, calculate the amount that should appear on Oliva’s statement of
financial position at Dec. 31, 2014, for inventory. Ans. P530,000.00

PROBLEM 3
Craig Company asks you to review its Dec. 31, 2014, inventory values and prepare the necessary
adjustments to the books. The following information is given to you:
1. Craig uses the periodic method of recording inventory. A physical count reveals
P234,890 of inventory on hand at Dec. 31, 2014.
2. Not included in the physical count of inventory is P13,420 of merchandise purchased on
Dec. 15 from Browser. This merchandise was shipped F.O.B. shipping point on Dec. 29
and arrived in January. The invoice arrived and was recorded on Dec. 30.
3. Included in inventory is merchandise sold to Champy on Dec. 30, F.O.B. destination.
This merchandise was shipped after it was counted. The invoice was prepared and
recorded as a sale on account for P12,800 on Dec. 31. The merchandise cost P7,350, and
Champy received it on January.
4. Included in inventory was merchandise received from Dudley on Dec. 31 with an invoice
price of P15,630. The merchandise was shipped F.O.B. destination. The invoice, which
has not yet arrived, has not been recorded.
5. Not included in inventory is P8,540 of merchandise purchased from Glowser Industries.
This merchandise was received on Dec. 31 after the inventory had been counted. The
invoice was received and recorded on Dec. 30
6. Included ni inventory was P10,438 of inventory held by Craig on consignment from
Jackel Industries.
7. Include in inventory is merchandise sold to Kemp F.O.B. shipping point. This
merchandise was shipped after it was counted. The invoice was prepared and recorded as
a sale for P18,900 on Dec. 31. The cost of this merchandise was P10,520, and Kemp
received the merchandise on Jan. 5.
8. Excluded from inventory was a carton labelled “Please accept for credit.”This carton
contains merchandise costing P1,500 which had been sold to a customer for P2,600. No
entry had been made to the books to reflect the return, but none of the returned
merchandise seemed damaged.

Required:
a) Determine the proper inventory balance for Craig Company at Dec. 31, 2014.
Ans. P237,392
b) Prepared any correcting entries to adjust inventory to its proper amount at Dec. 31, 2014.
Assume the books have not been closed.
Ans.
1. No entry
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2. No entry
3. Sales P12,800
A/R P12,800
4. Purchase P15,630
A/P P15,630
5. No entry
6. A/P P10,438
Purchases P10,438
7. No entry
8. Sales Returns P1,500
A/R P1,500

PROBLEM 4
Two or more items are omitted in each of the following tabulations of income statement data.
Fill in the amounts that are missing.

2013 2014 2015

Sales revenues P290,000 P? P410,000
Sales returns and allowances 11,000 13,000 ?
Net sales ? 347,000 ?
Beginning inventory 20,000 32,000 ?
Ending Inventory ? ? ?
Purchases ? 260,000 298,000
Purchase returns and allowances 5,000 8,000 10,000
Freight-in 8,000 9,000 12,000
Cost of goods sold 233,000 ? 293,000
Gross profit on sales 46,000 91,000 97,000

Ans.

2013 2014 2015

Sales revenues P290,000 P360,000 P410,000
Sales returns and allowances 11,000 13,000 20,000
Net sales 279,000 347,000 390,000
Beginning inventory 20,000 32,000 37,000
Ending Inventory 32,000 37,000 44,000
Purchases 242,000 260,000 298,000
Purchase returns and allowances 5,000 8,000 10,000
Freight-in 8,000 9,000 12,000
Cost of goods sold 233,000 256,000 293,000
Gross profit on sales 46,000 91,000 97,000
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PROBLEM 5
Some of the transactions of Torres Company during August are listed below. Torres uses the
periodic inventory method.
August 10 Purchased merchandise, P12,000, terms 2/10, n/30.
13 Returned part of the purchase of August 10, P1,200, and received
credit on account,
15 Purchased merchandise on account, P16,000, terms 1/10, n/60.
25 Purchased merchandise on account, P20,000, terms 2/10, n/30.
28 Paid invoice of August 15 in full.

Required:
A. Assuming that purchases are recorded at gross amounts and that discounts are to be
recorded when taken. Prepare general journal entries to record the transactions.
Ans.
8/10 Purchase P12,000
A/P P12,000

8/13 A/P P1,200

Purchase Returns P1,200

8/15 Purchase P16,000

A/P P16,000

8/25 Purchase P20,000

A/P P20,000

8/28 A/P P16,000

Cash P16,000

B. Assuming that purchases are recorded at net amounts and that discounts lost are treated as
financial expenses:
1. Prepare general journal entries to enter the transactions.

Ans.
8/10 Purchase P11,760
A/P P11,760

8/13 A/P P1,176

Purchase Returns P1,176
PA1- INVENTORIES

8/15 Purchase P15,840

A/P P15,840

8/25 Purchase P19,600

A/P P19,600

8/28 A/P P15,840

Interest Expense 160
Cash P16,000

2. Prepare the adjusting entry necessary on Aug. 31 if financial statements are to be

prepared at that time.
Ans.
8/10 Interest Expense P216
A/P P216

PROBLEM 6
Dimitri Company, a manufacturer of small tools, provided the following information from its
accounting records for the year ended Dec. 31, 2014.
Inventory at Dec.31, 2014 (based on physical count of goods
in Dimitri’s plant, at cost, on Dec. 31, 2014) P1,520,000
Accounts payable at Dec. 31, 2014 1,200,000
Net sales (sales less sales returns) 8,150,000

Additional information is as follows:

1. Included in the physical count were tools billed to a customer f.o.b. shipping point on
Dec. 31, 2014. These tools had a cost of P31,000 and were billed at P40,000. The
shipment was on Dimitri’s loading dock waiting to be picked up by the common carrier.
2. Goods were in transit from a vendor to Dimitri on Dec. 31, 2014. The invoice cost was
P76,000, and the goods were shipped f.o.b. shipping point on Dec. 29, 2014.
3. Works in process inventory costing P30,000 was sent to an outside processor for plating
on Dec. 30, 2014
4. Tools returned by customers and held pending inspection in the returned goods area on
Dec. 31, 2014, were not included in the physical count. On Jan. 8, 2015, the tools costing
P32,000 were inspected and returned to inventory. Credit memos totalling P47,000 were
issued to the customers on the same date.
5. Tools shipped to a customer f.o.b. destination on Dec. 26, 2014, were in transit at Dec.
31, 2014, and had a cost of P26,000. Upon notification of receipt by the customer on Jan.
2, 2015, Dimitri issued a sales invoice for P42,000.
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6. Goods, with an invoice of P27,000, received from a vendor at 5:00 p.m. on Dec. 31,
2014, were recorded on receiving report dated Jan. 2, 2015. The goods were not included
in the physical count, but the invoice was included in accounts payable at Dec. 31, 2014.
7. Goods received from a vendor on Dec. 26, 2014, were included in the physical count.
However, the related P56,000 vendor invoice was not included in accounts payable at
Dec. 31, 2014, because the accounts payable copy of the receiving report was lost.
8. On Jan. 3, 2015, a monthly freight bill in the amount of P8,000 was received. The bill
specifically related to merchandise purchased in Dec. 2014, one-half of which was still in
the inventory at Dec. 31, 2014. The freight charges were not included either the inventory
or in accounts payable at Dec. 31, 2014.

Required:
A. Adjusted Inventory balance Ans. P1,684,000
B. Adjusted Accounts Payable balance Ans. P1,340,000
C. Adjusted Net Sales Ans. P8,103,000

PROBLEM 7
Ehlo Company is a multiproduct firm. Presented below is information concerning one of its
products, the Hawkeye.
Date Transaction Quantity Price/Cost
1/1 Beginning Inventory 1,000 P12
2/4 Purchase 2,000 18
2/20 Sale 2,500 30
4/2 Purchase 3,000 23
11/4 Sale 2,200 33

Required:
Compute cost of goods sold, assuming Ehlo uses:
a) Periodic system, FIFO cost flow. Ans. P87,100
b) Perpetual system, FIFO cost flow. Ans. P87,100
c) Periodic system, weighted-average cost flow. Ans. P91,650
d) Perpetual system, moving-average cost flow. Ans. P88,400

PROBLEM 8
On Oct. 1, 2014, Antax Electronics Inc. entered into a 6-month, P520,000 ppurchase
commitment for a supply of product A. On Dec. 31, 2014, the market value of this material had
fallen to P420,000.

Required:
Make the journal entry necessary on the following:
PA1- INVENTORIES

1. October 1, 2014 Ans. NO ENTRY

2. December 31, 2014
Ans.
Loss on Purchase Commitment P100,000
Provision P100,000
3. March 31, 2015, assuming that the market value of the inventory on March 31 is:
a. P400,000
Ans.
Purchase P400,000
Loss on Purchase Commitment 20,000
Provision 100,000
Cash P520,000

b. P450,000
Ans.
Purchase P450,000
Loss on Purchase Commitment 100,000
Cash P520,000
Gain 30,000

c. P550,000
Ans.
Purchase P520,000
Loss on Purchase Commitment 100,000
Cash P520,000
Gain 100,000

PROBLEM 9
Michael Bolton Company follows the practice of pricing its inventory at the lower of cost or net
realizable value, on an individual item basis.0

Item No. Quantity Cost per Cost to Estimated Cost of Completion Normal
Unit Replace Selling Price and Disposal Profit
1320 1,200 P3.20 P3.00 P4.50 P0.35 P1.25
1333 900 2.70 2.30 3.50 0.50 0.50
1426 800 4.50 3.70 5.00 0.40 1.00
1437 1,000 3.60 3.10 3.20 0.25 0.90
1510 700 2.25 2.00 3.25 0.80 0.60
1522 500 3.00 2.70 3.80 0.40 0.50
1573 3,000 1.80 1.60 2.50 0.75 0.50
1626 1,000 4.70 5.20 6.00 0.50 1.00
PA1- INVENTORIES

Required:
From the information above, determine the amount of Bolton Company inventory. Ans. P25,845

PROBLEM 10
Alcala Company installs replacement siding, windows, and louvered glass doors for family
homes. At December 31, 2014, the balance of inventory account was P502,000, and the
allowance for inventory write down was P33,000. The inventory cost and other data on Dec. 31,
2014, are as follows: (amounts in thousands)

Item Cost Replacement Cost Sales Price NRV Normal Profit

A P 89 P 86 P 91 P 87 P 5
B 94 92 93 85 7
C 125 135 129 111 10
D 194 114 205 197 20
Total P 502 P 427 P 518 P 480 P 32

Required:
The gain on reversal of inventory writedown is: Ans. P8,000

PROBLEM 11
Phil Collins Realty Corporation purchase a tract of unimproved land for P55,000. This land was
improved and subdivided into building lots at an additional cost of P34,460. These building lots
were all of the same size but owing to differences in location were offered for sale at different
prices as follows.

Group No. of Lots Price per Lot

1 9 P3,000
2 15 4,000
3 17 2,400

Operating expenses for the year allocated to this project total P18,200. Lots unsold at the year-
end were as follows:

Group 1 5 lots
Group 2 7 lots
Group 3 2 lots

Required:
At the end of the fiscal year Phil Collins Realty Corporation instruct you to arrive at the net
income realized on the operation to date.
PA1- INVENTORIES

Ans. Sales P 80,000

COS ( 56,000)
OpEx ( 18,200)
NET INCOME P 5,800

PROBLEM 12
During 2014, Pretenders Furniture Company purchases a carload of wicker chairs. The
manufacturer sells the chairs to Pretenders for a lump sum of P59,850 because of it is
discontinuing manufacturing operations and wishes to dispose of its entire stock. Three types of
chairs are included in the carload. The three types and the estimated selling price for each are
listed below.

Type No. of Chairs Estimated Selling Price Each

Lounge Chairs 400 P90
Armchairs 300 80
Straight chairs 700 50

During 2014, Pretenders sells 200 lounge chairs, 100 armchairs, and 120 straight chairs.

Required:
What is the amount of gross profit realized during 2014? Ans. P11,840
What is the amount of inventory of unsold straight chairs on Dec. 31, 2014? Ans. P 18,750

PROBLEM 13
Mark Price Company uses the gross profit method to estimate inventory for monthly reporting
purposes. Presented below is information for the month of May.
Inventory, May 1 P 160,000
Purchases (gross) 640,000
Freight-in 30,000
Sales revenue 1,000,000
Sales returns 70,000
Purchase discounts 12,000

Required:
a) Compute the estimated inventory at May 31, assuming that the gross profit is 30% of
sales. Ans. P167,000
b) Compute the estimated inventory at May 31, assuming that the gross profit is 30% of
cost. Ans. P102,615
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PROBLEM 14
Tim Legler requires an estimate of the cost of goods sold lost by fire on March 9. Merchandise
on hand Jan.1 was P38,000. Purchases since Jan.1 were P72,000; freight-in, P3,400; purchase
returns and allowances, P2,400. Sales are made at 33 1/3% above cost and totalled P100,000 to
March 9. Goods costing P10,900 were left undamaged by the fire; remaining goods were
destroyed.

Required:
(a) Compute the cost of goods destroyed. Ans. P25,100
(b) Compute the cost of goods destroyed, assuming that the gross profit is 33 1/3% of sales.
Ans. P33,433

PROBLEM 15
Eastman Company lost most of its inventory in a fire in December just before the year-end
physical inventory was taken. Corporate records disclose the following:

Inventory (beginning) P 80,000 Sales revenue P 415,000

Purchases 290,000 Sales returns 21,000
Purchase returns 28,000 Gross profit % based on
net selling price 35%

Merchandise with a selling price of P30,000 remained undamaged after the fire, and damaged
merchandise has a net realizable value of P8,150. The company does not carry fire insurance on
its inventory.

Required:
How much is the fire loss incurred? Ans. P58,250

PROBLEM 16
Pugo uses the retail inventory method. The following information is available for the current
year:

Cost Retail
Beginning inventory P 1,300,000 P 2,600,000
Purchases 18,000,000 29,200,000
Freight 400,000
Purchase returns 600,000 1,000,000
Purchase allowances 300,000
Department transfer in 400,000 600,000
Net markups 600,000
Net markdowns 2,000,000
Sales 24,700,000
PA1- INVENTORIES

Sales returns 350,000

Sales discounts 200,000
Employee discount 600,000
Loss from breakage 50,000

Required:
Compute the estimated cost of inventory at the end of the current-year using:
1. Conventional (lower of cost or market) retail inventory
2. Average retail inventory method
Ans. Ending Inventory - P3,200; COGS – P16,000
3. FIFO retail inventory method
Ans. Ending Inventory - P3,250; COGS – P15,950

PROBLEM 17
An entity on adoption of IAS 41 has reclassified certain assets as biological assets. The total
value of the group’s forest assets is P 2,000,000 comprising:
Freestanding trees P 1,700,000
Land under trees 200,000
Roads in forests 100,000
P 2,000,000

Required:
How much should be reported as biological assets? Ans. P 1,700,000

PROBLEM 18
Below are list of assets from the records of AAA Co.
Sheep P 120,000 Pigs P 1,665,000
Wool 130,000 Carcass 325,000
Yarn, carpet 45,000 Sausages, cured hams 15,000
Trees in plantation forest 1,765,000 Bushes 45,000
Logs 356,000 Leaf 95,000
Lumber 780,000 Tea, cured tobacco 70,000
Plants 890,000 Vines 105,000
Cotton 55,000 Grapes 125,000
Harvested cane 12,000 Wine 790,000
Thread, clothing 10,000 Fruit trees 800,000
Sugar 45,000 Picked fruit 72,000
Dairy cattle 120,000 Diseased pigs 45,000
Milk 45,000 Processed fruit 80,000
Cheese 35,000 Wooden barrels 75,000
PA1- INVENTORIES

Required:
1. How much would be classified as Biological Assets in the Statement of Financial
Position of AAA Co.? Ans. P 5,510,000
2. How much would be classified under the agricultural produce? Ans. P 859,000
3. How much would be given accounting treatment under PAS 2? Ans. P 2,226,000

PROBLEM 19
An entity has these balances in its financial records:

Value of biological assets at cost 12/31/13 P 600,000

Fair value surplus on initial recognition at fair value 12/31/13 700,000
Change in fair value to 12/31/14 due to growth and price fluctuations 100,000
Decrease in fair value due to harvest 90,000

Required:
1. Compute the carrying amount of Biological Assets to be reported in the Company’s
statement of financial position. Ans. P 1,310,000
2. How much should be reported in the current year income statement?
Ans. P10,000 net gain

PROBLEM 20
DDD company is estimating the amount to which its biological assets with cost and market price
of P830,00 and P940,00, respectively, will be reported in the Statement of Financial Position.
You were given the following information:
Necessary costs of getting such biological assets to the market P 35,000
Commissions to brokers 12,000
Levies by the local government relating to the sale 30,000
Transfer taxes 12,000

Required:
How much is the estimated cost to sell? Ans. P 54,000

PROBLEM 21
A public limited company, Dairy, produces milk on its farms. It produces 30% of the country’s
milk that is consumed. Dairy owns 450 farms and has a stock of 210,000 cows and 105,000
heifers. The farms produce 8 million kilograms of milk a year and the average inventory held is
150,000 kilograms of milk. However, the company is currently holding stocks of 500,000
kilograms of milk in powder form. At December 31, 2014, the herds are
PA1- INVENTORIES

 210,000 cows (3 years old), all purchased on or before Jan. 1, 2013

 75,000 heifers, average age 1.5 years, purchased on July 1, 2014
 30,000 heifers, average age 2 years, purchased on Jan. 1, 2013

No animals were born or sold in the year.

The unit values less estimated cost to sell were

1-year-old animal at Dec. 31, 2014: P32
2-year-old animal at Dec. 31, 2014: 45
1.5-year-old animal at Dec. 31, 2014: 36
3-year-old animal at Dec. 31, 2014: 50
1-year-old animal at Jan. 1, 2013 and July 1, 2014 30
2-year-old animal at Jan. 1, 2013: 40

The company has had problems during the year: Contaminated milk was sold to customers. As a
result, milk consumption has gone down. The government has decided to compensate farmers for
potential loss in revenue from the sale of milk. This fact was published in the national press on
Nov.1, 2014. Dairy received an official letter on Nov.10, 2014, stating that P5M would be paid
to it on March 2, 2015.
The company’s business is spread over different parts of the country. The only region affected by
the contamination was Borthwick, where the government curtailed the milk production in the
region. The future discounted cash flow income from the cattle in the Borthwick region
amounted to P4M, after taking into account the government restriction order. The company feels
that it cannot measure the fair value of the cows in the region because of the problems created by
the contamination. There are 60,000 cows and 20,000 heifers in the region. All these animals had
been purchased on Jan. 1, 2013. A rival company had offered Dairy P3M for these animals after
estimated costs to sell and further offered P6M for the farms themselves in that region. Dairy has
no intention of selling the farms at present. The company has been applying IAS 41 since Jan. 1,
2013.

Required:
1. How much is the carrying amount of biological assets (excluding Borthwick Region) as
of Jan. 1, 2013? Ans. P6,300,000
2. How much is the increase in value of biological assets (excluding Borthwick Region) in
2014 due to price change? Ans. P 920,000
3. How much is the increase in value of biological assets (excluding Borthwick Region) in
2014 due to physical change? Ans. P 800,000
4. How much is carrying amount of biological assets (excluding Borthwick Region) as of
Dec. 31, 2014? Ans.P7,950,000
5. The cattle in Borthwick Region should be valued at: Ans. P 4,000,000
PA1- INVENTORIES

MULTIPLE CHOICE QUESTIONS

1. The following information applied to Fenn, Inc. for 2014:
Merchandise purchased for resale P400,000
Freight-in 10,000
Freight-out 5,000
Purchase returns 2,000

Fenn’s inventoriable cost was

A. P400,000
B. P404,000
C. P408,000
D. P413,000

2. On Dec. 28, 2014. Kerr Manufacturing Co. purchased goods costing P50,000. The terms
were FOB destination. Some of the costs incurred in connection with the sale and
delivery of the goods were as follows:
Packing for shipment P1,000
Shipping 1,500
Special handling charges 2,000

The goods were received on Dec. 31, 2014. In Kerr’s Dec.31, 2014 statement of financial
position, what amount of cost for these goods should be included in inventory?
A. P54,500
B. P53,500
C. P52,000
D. P50,000

3. On June 1, 2014, Pitt Corp. sold merchandise with a list price of P5,000 to Burr on
account. Pitt allowed trade discounts of 30% and 20%. Credit terms were 2/15, n/40 and
the sale was made FOB shipping point. Pitt prepaid P200 of delivery costs for Burr as an
accommodation. On June 12, 2014, Pitt received from Burr a remittance in full payment
amounting to
A. P2,744
B. P2,940
C. P2,944
D. P3,140

4. The following information was taken from Cody Co.’s accounting records for the year
ended Dec. 31, 2014:
Decrease in raw materials inventory P 15,000
PA1- INVENTORIES

Increase in finished goods inventory 35,000

Raw material purchased 430,000
Direct labor payroll 200,000
Factory overhead 300,000
Freight-out 45,000
There was no work in process inventory at the beginning or end of the year. Cody’s 2014
cost of goods is
A. P895,000
B. P910,000
C. P950,000
D. P955,000

5. The following information pertained to Azur Co. for the year:

Purchase P102,800
Purchase discounts 10,280
Freight in 15,240
Freight out 5,140
Beginning inventory 30,840
Ending inventory 20,560
What amount should Azur report as cost of goods sold for the year?
A. P102,800
B. P118,220
C. P123,360
D. P128,500

6. On Dec. 15, 2014, Flanagan purchased goods costing P100,000. The terms were FOB
shipping point. Costs incurred by Flanagan in connection with the purchase and delivery
of the goods were as follows:
Normal freight charges P3,000
Handling costs 2,000
Insurance on shipment 500
Abnormal freight charges for express shipping 1,200
The goods were received on Dec. 17, 2014. What is the amount that Flanagan should
charge to inventory and to current period expense?
Inventory Current period expense
A. P 3,000 P3,700
B. P5,000 P1,700
C. P5,500 P1,200
D. P6,700 P0
PA1- INVENTORIES

7. During January 2014, Metro Co., which maintains a perpetual inventory system, recorded
the ff. information pertaining to its inventory:
Units Unit cost Total cost Units on hand
Balance on 1/1/14 1,000 P1 P1,000 1,000
Purchased on 1/7/14 600 3 1,800 1,600
Sold on 1/20/14 900 700
Purchased on 1/25/14 400 5 2,000 1,100

Under the moving-average method, what amount should Metro report as inventories at
January 31, 2014?
A. P2,640
B. P3,225
C. P3,300
D. P3,900

Use the ff. information for the next two questions.

Miller Inc. is a wholesaler of office supplies, The activity for Model III calculator during
August is shown below:

Date Balance/Transaction Units Cost

Aug.1 Inventory 2,000 P36.00
7 Purchase 3,000 37.20
12 Sales 3,600
21 Purchase 4,800 38.00
22 Sales 3,800
29 Purchase 1,600 38.60
8. If Miller Inc. uses a FIFO perpetual inventory system, the ending inventory Model III
calculators at August 31 is reported as
A. P152,288
B. P152,960
C. P150,080
D. P150,160

9. If Miller Inc. uses a weighted average cost periodic inventory system, the ending
inventory of Model III calculators at Aug. 31 is reported as
A. P150,080
B. P152,960
C. P150,160
D. P146,400

10. Based on a physical inventory taken on Dec.31, 2014, Chewy Co. determined its
chocolate inventory on a FIFO basis at P26,000 with a replacement cost of P20,000.
PA1- INVENTORIES

Chewy estimated that, after further processing costs of P12,000, the chocolate could be
sold as finished candy bars for P40,000. Chewy’s normal profit margin is 10% of sales.
Under the lower of cost or net realizable value rule, what amount should Chewy report as
chocolate inventory in its Dec. 31,2014 statement of financial position?
A. P28,000
B. P26,000
C. P24,000
D. P20,000

11. On Jan.1, 2014, Card Corp, signed a three-year non-cancellable purchase contract, which
allows Card to purchase up to 500,000 units of a computer part annually from Hart
Supply Co. at P.10 per unit and guarantees a minimum annual purchase of 100,000 units.
During 2014, the part unexpectedly became obsolete. Card had 250,000 units of his
inventory at Dec. 31, 2014, and believes these parts can be sold as scrap for P.02 per unit.
What amount of probable loss from the purchase commitment should Card report in
2011 income statement?
A. P24,000
B. P20,000
C. P16,000
D. P8,000

12. Dart Company’s accounting records indicated the ff. information:

Inventory, 1/1/14 P 500,000
Purchases during 2014 2,500,000
Sales during 2014 3,200,000
A physical inventory taken on Dec.31, 2014, resulted in an ending inventory of P575,000.
Dart’s gross profit rate on sales has remained constant at 25% in recent years. Darts
suspects some inventory may have been taken by a new employee. AT Dec. 31, 2014,
what is the estimated cost of missing inventory?
A. P25,000
B. P100,000
C. P175,000
D. P225,000

13. The Bayambang Corp. was organized on Jan.1, 2013. On Dec. 31, 2014, the corporation
lost most of its inventory in a warehouse fire just before the year-end of the inventory
was to take place. Data from the records disclosed the ff:
PA1- INVENTORIES

2013 2014
Beginning Inventory, Jan. 1 P 0 P1,020,000
Purchases 4,300,000 3,460,000
Purchases returns and 230,600 323,000
allowances
Sales 3,940,000 4,180,000
Sales returns and allowances 80,000 100,000

On Jan. 1, 2014, the Corporation’s pricing policy was changed so that the gross profit rate
would be three percent points higher than the earned in 2013.

Salvaged undamaged merchandise was marked to sell at P120,000 while damaged

merchandise was marked to sell at P80,000 had an estimated realizable value of P18,000.

How much is the inventory loss due to fire?

A. P918,200
B. P947,000
C. P856,200
D. P824,600

14. On Dec. 24, 2014, a fire destructed totally the raw materials bodega of Bautista
Manufacturing Co. There was no purchase of raw materials from the time of the fire until
Dec. 31, 2014.

01/01/14 12/31/14
Raw materials P 90,000 ?
Factory supplies 6,000 P 5,000
Goods in process 185,000 210,000
Finished goods 220,000 225,000

The accounting records show the ff. data:

Sales P 1,200,000
Purchases of raw materials 400,000
Purchases of factory supplies 30,000
Freight-in, raw materials 15,000
Direct labor 220,000
Manufacturing overhead 75% of direct labor
Gross profit rate 35% of sales

The cost of the raw materials destroyed by the fire was

A. P140,000
B. P 75,000
PA1- INVENTORIES

C. P80,000
D. P176,000

15. The records of Binmaley’s Dept. Store report the ff. data for the month of January 2014:

Sales P 7,100,000
Sales allowances 100,000
Sales returns 500,000
Employee discounts 200,000
Theft and other losses 100,000
Initial markup on purchases 2,900,000
Addtional markup 250,000
Mark up cancellation 100,000
Mark down 600,000
Mark down cancellation 100,000
Freight on purchases 100,000
Purchase at cost 4,500,000
Purchase returns at cost 240,000
Purchase returns at sales price 350,000
Beginning inventory at cost 440,000
Beginning inventory at sales price 800,000

Using the average retail inventory method, Binmaley’s ending inventory is

A. P360,000
B. P384,000
C. P420,000
D. P448,000

16. Londinium Corp., values its inventory by using the retail method (FIFO basis, lower of
cost or NRV). The ff. information is available for the year just ended:

Cost Retail
Beginning inventory P 80,000 P 140,000
Purchases 297,000 420,000
Freight-in 4,000 -
Breakage 8,000
Markups (net) 10,000
Markdowns (net) 2,000
Sales 400,000

At what amount would Londinium report its ending inventory?

A. P112,000
B. P113,400
C. P117,600
PA1- INVENTORIES

D. P119,000

17. O July 1, 2014, Casa Development Co. purchased a tract of land for P1,200,000. Casa
incurred additional cost of P300,000 during the remainder of 2014 in prepairing the land
for sale. The tract was subdivided into residential lots as follows:
Lot Class Number of lots Sales price per lot
A 100 P24,000
B 100 16,000
C 200 10,000
Using the relative sales value method, what amount of costs should be allocated to the
Class A lots?
A. P300,000
B. P375,000
C. P600,000
D. P720,000

18. Herc Co.’s inventory at Dec. 31, 2014, was P1,500,000 based on a physical count priced
at cost, and before any necessary adjustment for the ff:
 Merchandise costing P 90,000, shipped FOB shipping point from a vendor on
Dec. 30, 2011, was received and recorded on Jan. 5, 2015.
 Goods in the shipping area were excluded from the inventory although shipment
was not made until Jan. 4, 2015. The goods, billed to the customer FOB shipping
point on Dec. 30, 2014, had a cost of P120,000.
What amount should Herc report as inventory in its Dec. 31, 2014 statement of financial
position?
A. P1,500,000
B. P1,590,000
C. P1,620,000
D. P1,710,000
‘
19. Kew Co.’s accounts payable balance at Dec. 31 2014, was P2,200,000 before considering
the ff. data:
 Goods shipped to Kew FOB shipping point on Dec. 22, 2014, were lost in transit.
The invoice cost of P40,000 was not recorded by Kew. On Jan. 7, 2015, Kew filed
a P40,000 claims against the common carrier.
 On Dec. 27, 2014, a vendor authorized Kew to return, for full credit, good
shipped and billed at P70,000 on Dec 3, 2014. The returned goods were shipped
by Kew on Dec. 28, 2014. A P70,000 credit memo was received and recorded by
Kew on January 5, 2015.
 Goods shipped to Kew FOB destination on Dec. 20, 2014, were received on Jan.
6, 2015. The invoice cost was P 50,000.
PA1- INVENTORIES

What amount should Kew report as accounts payable in its Dec. 31, 2014 statement of
financial position?
A. P2,170,000
B. P2,180,000
C. P2,230,000
D. P2,280,000

20. Lewis Company’s usual sales terms are net sixty days, FOB shipping point. Sales, net of
returns and allowances; totalled P2,300,000 for the year ended Dec. 31, 2014, before
year-end adjustments. Additional data are follows:
 On Dec. 27, 2014, Lewis authorized a customer to return, for full credit, goods
shipped and billed at P50,000 on Dec. 15, 2014. The returned goods were
received by Lewis on Jan. 4, 2015 and a P50,000 credit memo was issued and
recorded on the same date.
 Goods with an invoice amount of P80,000 were billed and recorded on Jan. 3,
2015. The goods were shipped on Dec. 30, 2014.
 Goods with an invoice amount of P100,000 were billed and recorded on Dec. 30,
2014. The goods were shipped on Jan. 3, 2015.
Lewis’ adjusted net sales for 2014 should be
A. P2,330,000
B. P2,280,000
C. P2,250,000
D. P2,230,000

21. On Jan. 1, 2014, Dell Inc. contracted with the city of the Little to provide custom built
desks for the city schools. The contract made Dell the city’s sole supplier and required
Dell to supply no less than 4,000 desks and no more than 5,500 desks per year for two
years. In turn, Little agreed to pay a fixed price of P110 per desk. During 2014, Dell
produced 5,000 desks for Little. At Dec. 30, 2014, 500 of these desks were segregated
from the regular inventory and were accepted and awaiting pickup by Little. Little paid
Dell P450,000 during 2014. What amount should Dell recognize as contract revenue in
2014?
A. P450,000
B. P495,000
C. P550,000
D. P605,000

22. On Oct. 20, 2014, Grimm Co. consigned forty freeaers to Holden Co. for sale at P1,000
each and paid P800 in transportation costs. On Dec. 30, 2014, Holden reported the sale of
PA1- INVENTORIES

ten freezers and remitted P8,500. The remittance was net of the agreed 15% commission.
What amount should Grimm recognize as consignment sales revenue for 2014?
A. P7,700
B. P8,500
C. P9,800
D. P10,000

23. The ff. items were included in Opal Co.’s inventory account at Dec. 31, 2014:
Merchandise out on consignment, at sales price, including
40% markup on selling price P40,000
Goods purchased, in transit, shipped FOB shipping point 36,000
Goods held on consignment by Opal 27,000

By what amount should Opal’s inventory account at Dec. 31, 2014, be reduced?
A. P103,000
B. P 67,000
C. P 51,000
D. P 43,000

24. On Dec. 1, 2014, Alt Department Store received 505 sweaters on consignment from
Todd. Todd’s cost for the sweaters was P80 each and they were priced to sell at P100.
Alt’s commission on consigned goods is 10%. At Dec. 31, 2014, five sweaters remained.
In its Dec. 31, 2014 statement of financial position, what amount should Alt report as
payable for consigned goods?
A. P49,000
B. P45,400
C. P45,000
D. P40,400

25. During 2014, Rand Co. purchased P960,000 of inventory. The cost of goods sold for
2014 was P900,000 and ending inventory at Dec. 31, 2014, was P180,000.

What was the inventory turnover for 2014?

A. 6.4
B. 6.0
C. 5.3
D. 5.0
PA1- INVENTORIES

26. Brady Corporation values its inventory at the lower of cost or net realizable value as
required by IFRS. Brady has the ff. information regarding its inventory:
Historical cost P1,000
Estimated selling price 900
Estimated costs to complete and sell 50
Replacement cost 800
What is the amount for inventory that Brady should report on the statement of financial
position under the lower of cost or net realizable value method?
A. P1,000
B. P 900
C. P 850
D. P 750

27. A company determined the ff. values for its inventory as of the end of its fiscal year:
Historical cost P100,000
Current replacement cost 70,000
Net realizable value 90,000
Net realizable value less a normal profit 85,000
Fair value 95,000

What amount should the company report as inventory on its statement of financial
position?
A. P70,000
B. P85,000
C. P90,000
D. P95,000

Use the ff. information for the next three questions.

A public limited company, Cromwell Dairy Products, produces milk on its farms. As of
Jan. 1, 2014 Cromwell has a stock of 1,050 cows (average age, 2 years old) and 150
heifers (average age, 1 year old). Cromwell purchased 375 heifers, average age 1 year
old, on July 1, 2014. No animals were born or sold in the year. The unit values less
estimated cost to sell were:
1-year-old animal at Dec. 31, 2014: P3,200
2-year-old animal at Dec. 31, 2014: 4,500
1.5-year-old animal at Dec. 31, 2014: 3,600
3-year-old animal at Dec. 31, 2014: 5,000
1-year-old animal at Jan. 1, 2014 and July 1, 2014 3,000
2-year-old animal at Jan. 1, 2014: 4,000
PA1- INVENTORIES

28. The increase in value of biological assets in 2014 due to price changes is
A. P1,500,000
B. P 630,000
C. P 555,000
D. P 460,000

29. The increase in value of biological assets in 2014 due to physical changes is
A. P870,000
B. P720,000
C. P590,000
D. P780,000

30. The carrying amount of the biological assets as of Dec. 31, 2014 is
A. P7,325,000
B. P7,275,000
C. P6,825,000
D. P6,150,000