Question 1

You are auditing the financial statements of Bryan Inc. for the year ended December 31, 2013.
The company maintains its books on a semi-accrual and semi-cash basis. Purchases and sales
are recognized on an accrual basis while other operating expenses are kept on cash basis. The
company bookkeeper presented to you a draft of its income statements for the year under audit:

Sales 600,000
Cost of Sales 360,000
Gross Profit 240,000
Depreciation Expense (29,000)
Other Expenses (166,000)
Interest Expense (20,000)
Net Income 25,000
Your investigation revealed the following information:

On January 1, 2013, Bryan issued P200,000, 10%, 10 year bonds when the market
rate of interest was 8%. Interest is payable on June 30 and December 31.
All purchases of inventory are on account and other expenses reflect those
expenses paid in cash during the period.
The company had open invoice (unpaid invoices) from suppliers amounting to
P120,000 on December 31, 2013 and P116,000 on January 1, 2013
The company had outstanding invoices (uncollected invoices) to customers
amounting to P96,000 on January 1, 2013 and P110,000 on December 31, 2013.
Inventory taking at the end of each year revealed that inventory on hand on
December 31, 2012 amounted to P186,000 while inventory on December 31, 2013
was at P174,000.
Accrued utilities at the beginning and at the end of the year amounted to
P5,000 and P7,000 respectively while prepaid rentals at the beginning and at the
end of the year amounted to P10,000 and P14,000, respectively.
How much was paid for inventory purchases?
344,000
368,000
348,000
372,000

2.0 Financial Accounting and Reporting - 5.0 Inventories (Difficult)

Question 2
Aman Company provides the following data with respect to its inventory:

Items counted in the bodega 4,000,000

Items included in the count specifically segregated per  
sale contract 100,000
Items in the receiving department, returned by customer  
in good condition 50,000
Items ordered and in the receiving department, invoice  
not received 400,000
Items ordered, invoice received but goods not received. 300,000
Freight is on account of seller
Items shipped today, invoice mailed, FOB shipping point 250,000
Items shipped today, invoice mailed, FOB destination 150,000
Items currentlybeing used for window display 200,000
Items on counter for sale 800,000
Items in receiving department, refused by AmanCompany 180,000
because of damage
Items included in count, damaged and unsalable 50,000
Items in the shipping department 250,000
What is the correct amount of inventory?
5,700,000
5,150,000
5,800,000
6,000,000

SOLUTION:

Items counted in the bodega 4,000,000

Items included in the count specifically segregated  
per sale contract (100,000)
Items in the receiving department, returned by  
customer in good condition 50,000
Items ordered and in the receiving department,  
invoice not received 400,000
Items shipped today, invoice mailed, FOB 150,000
destination
Items currentlybeing used for window display 200,000
Items on counter for sale 800,000
Items included in count, damaged and unsalable (50,000)
Items in the shipping department 250,000
  5,700,000
2.0 Financial Accounting and Reporting - 5.0 Inventories (Difficult)

Question 3
PAS 2 requires separate disclosure of:
where there has been abnormal wastage which has been expensed
interest costs which have been capitalised into the cost of inventory
details of key terms of purchase
details of inventory pledged as security for loans
2.0 Financial Accounting and Reporting - 5.0 Inventories (Difficult)

Question 4
All of the following are common classifications for the disclosure of inventories in a set of
financial statements:

  I II III IV
Raw materials Yes Yes No No
Finished goods Yes Yes Yes Yes
Work in progress No Yes Yes No
Assets held for resale No Yes No Yes

IV. I II III
2.0 Financial Accounting and Reporting - 5.0 Inventories (Difficult)

Question 5
Which of the following internal control activities most likely would prevent direct labor hours from
being charged to manufacturing overhead?
Reconciliation of work-in-process inventory with periodic cost budgets
Periodic independent counts of work in process for comparison to recorded amounts
Comparison of daily journal entries with approved production orders
 Use of time tickets to record actual labor worked on production orders

2.0 Financial Accounting and Reporting - 5.0 Inventories (Difficult)

Question 6
When determining the net realisable value of inventory, estimates must be made of the
following:

I Estimated costs of completion (if

any).
II Expected replacement cost.
III Expected selling price.
IV Estimated selling costs.

II and IV only; I, II, III and IV; I, III and IV only. I, II and III only;
2.0 Financial Accounting and Reporting - 5.0 Inventories (Difficult)

Question 7
Mint Manufacturing is a manufacturing business. During 2013 financial year, the directors
reviewed Mint’s accounting policies and identified inventories as an area where it could change
the current accounting policy with respect to inventory to better reflect the actual economic
substance of its business.
The directors decided to change the valuation method used for raw material from the weighted
average cost method to the FIFO method.
The value of the inventories is as follows:

  Weighted average FIFO

December 31, 2012 160,000 140,000
December 31, 2013 190,000 160,000
Mint was unable to obtain figures as at January 1, 2012, for inventory in terms of FIFO as it was
determined to be impractical. Ignore any income tax effects.
How much is the net decrease in inventory value to be recorded as part of cost of sales on
December 31, 2013?
20,000 50,000 10,000 30,000
SOLUTION:

The changes in the closing carrying amounts of inventories due to the change in the accounting
policy are as follows:

  Weighted average FIFO Decrease in values

December 31, 2012 160,000 140,000 (20,000)
December 31, 2013 190,000 160,000 (30,000)
Due to the change in the accounting policy, the carrying values of inventories decreased at the
beginning of the period with P20,000 and the end of the period with P30,000. The effect of this
decrease is an increase in the cost of sales of P10,000 (30,000-20,000) for the period ended
December 31, 2012. Journal entry: December 31, 2013

Cost of sales 10,000  

Retained earnings 20,000  
Inventories   30,000
2.0 Financial Accounting and Reporting - 5.0 Inventories (Difficult)

Question 8
Net realisable 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.
 I, III and IV only; I and II only. I, II and IV only; II, III and IV only;
2.0 Financial Accounting and Reporting - 5.0 Inventories (Difficult)

Question 9
At December 31, 2012, Rick Corporation reported current assets of P2,400,000 and current
liabilities of P1,200,000. The following items may have been recorded incorrectly.

I Goods purchased costing P132,000 were shipped FOB shipping point by a

supplier on December 28. Rick received and recorded the invoice on
December 29, but the goods were not included in Rick’s physical count of
inventory because they were not received until January 4.
II Goods purchased costing P90,000 were shipped FOB destination by a
supplier on December 26. Rick received and recorded the invoice on
December 31, but the goods were not included in Rick’s physical count of
inventory because they were not received until January 2.
III Goods held on consignment from Magno Corporation were included in
Rick’s physical count of inventory at P78,000.
By what amount will income before taxes be adjusted up or down as a result of the corrections?
P120,000 increase
P36,000 decrease
P144,000 increase
P78,000 decrease

2.0 Financial Accounting and Reporting - 5.0 Inventories (Difficult)

Question 10
Crown Asia Compounders Corp
Incorporated in 1989 as Crown Asia Compounders Corp., the company is currently engaged in
the production of plastic compounds, pipes and related products for the construction and
telecommunication industries, particularly the manufacture of plastic compounds, polyvinyl
chloride (PVC) pellets and plastic pipes.
Over the past three years, the company sold 58.06% of its compounds to the local market, and
the rest to the export market. Pipe products, on the other hand, are purely sold domestically.
As of Jan. 31, 2015, Crown Asia has a total of 245 employees, and an operating capacity of
15,000 million tonnes per annum (MPTA) for its compounds business and 8,500 MTPA for its
pipes business. It is controlled by the Villanueva and Perez families, collectively owning 74.95%
of the firm after the offering.
Crown Asia’s net income to rose by an annual 31.42% to P65.38 million in 2014, while revenues
inched up by 6.1% to P850.74 million in the same period.
Crown Asia plans to sell 158 million primary common shares at P1.41 apiece from April 10 to
April 17, it said in its prospectus filed with the SEC.
The Securities and Exchange Commission (SEC) approved the transaction during its en banc
meeting.
Of the net proceeds, P66.2 million will be used for construction of polypropylene random
copolymer (P-PR) and high-density polyethylene (HDPE) manufacturing plant and warehouse
as well as purchase of equipment; P43.8 million for debt retirement; P25 million for
modernization of existing compounds and pipes plants; and P68.99 million for working capital
purposes. The par value per common share is P1.00 apiece.
Abacus Capital & Investment Corp. was appointed as the issue manager and underwriter.
At the completion of the offer the offer shares will comprise 25.05% of the company’s issued
and outstanding shares. Of the offer shares, 20% will be allocated to the Philippine Stock
Exchange trading participants, 10% to local small investors, and the remaining 70% to the
general public.
All of the Offer shares shall be primary shares to be taken from the existing authorized capital
stock of the company. No secondary shares shall form part of the Offer.
Infinity Inc.
The Villanueva family also owns a substantial ownership of Infinity Inc, a trading company.
The following information was taken from the ledger of Infinity, Inc.
 Prior period adjustment credit to retained earnings 5,000
Gain on sale of PPE 21,000
Cost of goods sold 380,000
Income tax expense (saving):  
Continuing operations 32,000
Discontinued operations 8,000
Preference share, 8%, P100 par 500 shares issued 50,000
Dividends 16,000
Retained earnings, beginning, as originally reported 103,000
Treasury shares, ordinary (5,000 shares at cost) 25,000
Selling expenses 78,000
Ordinary share, no par, 45,000 shares issued 180,000
Sales revenue 620,000
Interest expense 30,000
Income from discontinued operations 20,000
Loss due to lawsuit 11,000
General expenses 62,000
Maine Company
The Perez family also owns Maine Company, a company that operates a chain of restaurants.

Maine Company
Consolidated Statements of Income
Years Ended December 31, 2016 and 2015
(in millions, except per share data) 2016 2015
Revenues    
Sales by company-related restaurants 13,200 11,100
Revenues from franchised and affiliated restaurants 4,500 3,700
Total revenues 17,700 14,800
Food and paper (cost of goods sold) 3,300 3,108
Payroll and employee benefits 3,200 3,000
Occupancy and other operating expenses 2,900 2,800
Franchised restaurants - occupancy expenses 949 850
Selling, general, and administrative expenses 1,820 1,730
Other operating expense, net 510 855
Total operating expenses 12,679 12,343
Operating income 5,021 2,457
Interest expense 370 345
Other nonoperating expense, net 140 168
Income before income taxes 4,511 1,944
Income tax expense 1,820 820
Net income 2,691 1,124
Per ordinary share basic:    
Net income 2.69 1.15
Dividends per ordinary share 0.50 0.24
Maine Company
Consolidated Balance Sheet
December 31, 2016 and 2015
(in millions, except per share data 2016 2015
Assets    
Current assets    
Cash and cash equivalents 690 455
Accounts and notes receivable 780 840
Inventories 140 120
Prepaid expense and other current assets 580 440
Total current assets 2,190 1,855
Other assets    
Investment in affiliates 1,150 1,055
Goodwill, net 1,780 1,590
 Miscellaneous 990 1,100
Total other assets 3,920 3,745
Property and equipment    
Property and equipment, at cost 28,800 26,500
Accumulated depreciation and amortization (8,850) (7,900)
Net property and equipment 19,950 18,600
Total assets 26,060 24,200
Liabilities and shareholders’ equity    
Current liabilities    
Accounts payable 520 675
Income taxes 70 14
Other taxes 230 180
Accrued interest 189 196
Accrued restructuring and restaurant closing costs 110 385
Accrued payroll and other liabilities 890 795
Current maturities of long-term debt 365 305
Total current liabilities 2,374 2,550
Long-term debt 8,700 9,500
Other long-term liabilities and minority interests 690 520
Deferred income taxes 1,005 1,015
Shareholders’ equity    
Preference shares, no par value, authorized 140    
million shares, issued, none - -
Ordinary shares, P0.01 par value, authorized 2    
billion shares; issued 1,400 million shares 14 14
Additional paid-in capital 1,786 1,662
Unearned ESOP compensation (85) (101)
Retained earnings 21,741 19,550
Accumulated other comprehensive income (loss) (815) (1,570)
Ordinary shares in treasury, at cost; 400 and 420    
million shares (9,350) (8,940)
Total shareholders’ equity 13,291 10,615
Total liabilities and shareholders’ equity 26,060 24,200
Manor Corporation
Manor Corporation is a joint venture between the Villanueva and Perez families. The company
reported the following income statement and comparative balance sheets, along with
transaction data for 2016.

Manor Corporation
Income Statement
Year Ended December 31, 2016
Sales revenue   662,000
Cost of goods sold   560,000
Gross profit   102,000
Operating expenses    
Salary expense 46,000  
Depreciation expense-equipment 7,000  
Amortization expense - patent 3,000  
Rent expense 2,000  
Total operating expenses   58,000
Income from operations   44,000
Other items:    
Loss on sale of equipment   (2,000)
Income before income tax   42,000
Income tax expense   16,000
Net income   26,000
Manor Corporation
Comparative Balance Sheets
 December 31, 2016 and 2015
  2016 2015
Assets    
Current assets    
Cash and cash equivalents 19,000 3,000
Accounts receivable 22,000 23,000
Inventories 34,000 31,000
Prepaid expenses 1,000 3,000
Total current assets 76,000 60,000
Long-term investments 18,000 10,000
Equipment, net 67,000 52,000
Patent, net 44,000 10,000
Total Assets 205,000 132,000
     
Liabilities    
Current liabilities    
Accounts payable 35,000 26,000
Accrued liabilities 7,000 9,000
Income tax payable 10,000 10,000
Total current liabilities 52,000 45,000
Long-term note payable 44,000 -
Bonds payable 40,000 53,000
Owner’s equity    
Share capital 52,000 20,000
Retained earnings 27,000 19,000
Less: Treasury shares (10,000) (5,000)
Total liabilities and equity 205,000 132,000
Transaction data for 2016:

Purchase of equipment 98,000

Payment of cash dividends 18,000
Issuance of shares to retire bonds payable 13,000
Purchase of long-term investment 8,000
Purchase of treasury shares 5,000
Issuance of long-term note payable to purchase patent 37,000
Issuance of long-term note payable to borrow cash 7,000
Issuance of shares for cash 19,000
Sale of equipment (book value, P76,000) 74,000
Maine’s inventory turnover for 2016 was
17 times 61 times 72 times 25 times
SOLUTION:

(P3,300/(P140 + P120)/2) = 25 times

2.0 Financial Accounting and Reporting - 5.0 Inventories (Difficult)

Question 11
Jojy Corporation encounters the following product cost situations as part of its quarterly
reporting:

1 It only conducts inventory counts at the end of the 2nd quarter and end of the
fiscal year. Its typical gross profit is 30%. The actual gross profit at the end of the
2nd quarter is determined to have been 32% for the first 6 months of the year. The
actual gross profit at the end of the year is determined to have been 29% for the
entire year.
2 It determines that, at the end of the 2nd quarter, due to peculiar market conditions,
there is a net realizable value adjustment to certain inventory required in the
amount of P90,00. Jojy expects that this market anomaly will be corrected by
year-end, which indeed does occur in late December.
 3 It suffers a decline of P65,000 in the market value of its inventory during the third
quarter. This inventory value increases by P75,000 in the 4th quarter.
4 It suffers a clearly temporary decline of P10,000 in the market value of a specific
part of its inventory in the first quarter, which recovers in the 2nd quarter.
The sales of the Company are as follows:

1st Quarter 10,000,000

2md Quarter 8,500,000
3rd Quarter 7,200,000
4th Quarter 11,800,000
How much is the total cost of goods sold in the 1st quarter?
7,050,000 7,010,000 5,600,000 7,000,000
SOLUTION:

  1st Qrtr 2nd Qrtr 3rd Qrtr 4th Qrtr Full Year
Sales 10,000,000 8,500,000 7,200,000 11,800,000 37,500,000
COS % 70% - 70% - -
COS, GP method 7,000,000 - 5,040,000 - -
COS based on          
actual count - 5,580,000 (1) - 9,005,000 (2) 26,625,000
Temporary net          
realizable value          
decline in          
specific inventory - 90,000 - (90,000) -
(3)
Decline in          
inventory value          
with subsequent          
increase (4) - - 65,000 (65,000) -
Temporary          
decline in          
inventory value          
(5) 10,000 (10,000) - - -
Total COS 7,010,000 5,660,000 5,105,000 8,850,000 26,625,000
(1) 18,000,000 x (1-32% gross margin) - 7,000,000 (1st quarter cost of sales) (2) 37,500,000
sales x (1-29% gross margin) - 17,620,000 (Quarters 1-3 cost of sales) (3) Eventhough
anticipated to recover, the NRV decline must be recognized. (4) Full recognition of market value
decline, followed by recognition of market value increase, but only in the amount needed to
offset the amount of the initial decline. (5) No deferred recognition to temporary decline in value.
2.0 Financial Accounting and Reporting - 5.0 Inventories (Difficult)

Question 12
Siemens Cellular ships a consignment of its smartphone to a retail outlet of the Consumer
Products Division. Siemens Cellular’s cost of the consigned goods is P3,700, and it shifts the
inventory cost into a separate inventory count to track the physical location of the goods. The
entry is as follows:

Consignment out inventory 3,700  

Finished goods inventory   3,700
A third party shipping company ships the smartphones from Siemens Cellular to Consumer
Products. Upon receipt of an invoice for this P550 shipping expense, Siemens Cellular charges
the cost to consignment inventory with the following entry:

Consignment out inventory 550  

Accounts payable   550
Consumer Products sells half the consigned inventory during the month for P2,750 in credit card
payments, and earn a 22% commission on these sales, totaling P605. According to the
consignment arrangement, Siemens Cellular must reimburse Consumer Products for the 2%
credit card processing fee.
How much is due to Siemens Cellular?
 2,695 2,550 2,750 2,090
SOLUTION:

Sales price to Consumer Product’s customer earned on behalf of Siemens  

Cellular 2,750
Less: Amounts due to Customer Product in accordance with arrangement  
22% sales commission 605
Reimbursement for credit card processing fee (2,750 x 2%) 55
Due to Siemens Cellular 2,090
2.0 Financial Accounting and Reporting - 5.0 Inventories (Difficult)

Question 13
The physical count of Josef Company on December 31, 2012 revealed merchandise with a total
cost of P5,000,000. Goods sold to a customer, which are being held for the customer to call at
the customer's convenience with a cost of P200,000 were excluded from the count. A packaging
case containing a product costing P500,000 was standing in the shipping room when the
physical inventory was taken. This was not included in the inventory because it was marked
"hold for shipping instructions." An investigation revealed that the customer's order was dated
December 28, 2012, but that that case was shipped and the customer billed on January 4,
2013. A special machine costing P250,000, fabricated to order for a customer, was finished and
specifically segregated at the shipping room on December 31, 2012. The customer was billed
on that date and the machine was excluded from the inventory although it was shipped on
January 2, 2013. What is the correct amount of inventory that should be reported on December
31, 2012?
5,950,000
5,750,000
5,500,000
5,700,000

2.0 Financial Accounting and Reporting - 5.0 Inventories (Difficult)

Question 14
In your audit of the December 31, 2012, financial statements of John Inc, you found the
following inventory related transactions.

1 Goods costing P50,000 are on cosnignment with a customer. These goods were not

included in the physical count on December 31, 2012.
2 Goods costing P16,500 were delivered to John, Inc on January 4, 2013. The invoice
for these goods was received and recorded on January 10, 2013. The invoices and
the shipment was made on December 29, 2012, FOB shipping point.
3 Goods costing P21,640 were shipped FOB shipping point on December 31, 2012,
and were received by the customer on January 2, 2013. Although the sale was
recorded in 2012, these goods were included in the 2012 ending inventory.
4 Goods costing P8,640 were shipped to a customer on December 31, 2012, FOB
destination. These goods were delivered to the customer on January 5, 2013, and
were not included in the inventory. The sale was properly taken up in 2013.
5 Goods costing P8,600 shipped by a vendor under FOB destination term, were
received on January 3, 2013, and thus were not included in the physical inventory.
Because the related invoice was received on December 31, 2012, this shipment was
recorded as a purchase in 2012.
6 Goods valued at P51,000 were received from a vendor under consignment term.
These goods were included in the physical count.
7 John, Inc. recorded as a 2012 sale a P64,300 shipment of goods to a customer on
December 31, 2012, FOB Destination. This shipment of goods costing P37,500 was
received by the customer on January 5, 2013, and was not included in the ending
inventory figure.
Prior to any adjustments, John, Inc.’s ending inventory is valued at P445,000 and the reported
net income for the year is P1,648,000.
What is John’s adjusted net income for 2012?
1,607,160
1,565,800
1,666,800
1,615,800

2.0 Financial Accounting and Reporting - 5.0 Inventories (Difficult)

Question 15
In your audit of the December 31, 2012, financial statements of John Inc, you found the
following inventory related transactions.

1 Goods costing P50,000 are on cosnignment with a customer. These goods were not

included in the physical count on December 31, 2012.
2 Goods costing P16,500 were delivered to John, Inc on January 4, 2013. The invoice
for these goods was received and recorded on January 10, 2013. The invoices and
the shipment was made on December 29, 2012, FOB shipping point.
3 Goods costing P21,640 were shipped FOB shipping point on December 31, 2012,
and were received by the customer on January 2, 2013. Although the sale was
recorded in 2012, these goods were included in the 2012 ending inventory.
4 Goods costing P8,640 were shipped to a customer on December 31, 2012, FOB
destination. These goods were delivered to the customer on January 5, 2013, and
were not included in the inventory. The sale was properly taken up in 2013.
5 Goods costing P8,600 shipped by a vendor under FOB destination term, were
received on January 3, 2013, and thus were not included in the physical inventory.
Because the related invoice was received on December 31, 2012, this shipment was
recorded as a purchase in 2012.
6 Goods valued at P51,000 were received from a vendor under consignment term.
These goods were included in the physical count.
7 John, Inc. recorded as a 2012 sale a P64,300 shipment of goods to a customer on
December 31, 2012, FOB Destination. This shipment of goods costing P37,500 was
received by the customer on January 5, 2013, and was not included in the ending
inventory figure.
Prior to any adjustments, John, Inc.’s ending inventory is valued at P445,000 and the reported
net income for the year is P1,648,000.
Which of the errors described in 1 to 7 will not affect the company’snet income for 2012?
Item b
Item a
Item e
Item g

SOLUTION:

The goods were purchased under FOB shipping point term and they were shipped on
December 31, 2012. The company’s failure to record the purchase in 2012 will overstate its
income by P16,500. However, since the goods were not included in the year-end physical
count, the client’s ending inventory is understated and the company’s net income will be
understated by P16,500. Hence, the combined effect on 2012 net income is zero.
2.0 Financial Accounting and Reporting - 5.0 Inventories (Difficult)

Question 16
All of the following are common classifications for the disclosure of inventories in a set of
financial statements:
   I II III IV
Raw materials Yes Yes No No
Finished goods Yes Yes Yes Yes
Work in progress No Yes Yes No
Assets held for resale No Yes No Yes

I II III IV.
2.0 Financial Accounting and Reporting - 5.0 Inventories (Difficult)

Question 17
The management of Michael, Inc has engaged you to assist in the preparation of year-end
financial statements. You are told that on November 30, the correct inventory level was 145,730
units. During the month of December, sales totaled 138,630 units including 40,000 units shipped
on consignment to Matthew Corp. A letter received from Matthew indicates that as of December
31, it has sold 15,200 units and was still trying to sell the reminder.A review of the December
purchase orders to various suppliers shows the following:

PO Date Inv. Date Qty in Date Date Terms

units shipped received
12/31/2012 1/2/2013 4,200 1/2/2013 1/5/2013 FOB Destination
12/5/2012 1/2/2013 3,600 12/17/2012 12/22/2012 FOB Destination
12/6/2012 1/3/2013 7,900 1/5/2013 1/7/2013 FOB Shipping point
12/18/2012 12/20/12 8,000 12/29/2012 1/2/2013 FOB Shipping point
12/22/2012 1/5/2013 4,600 1/4/2013 1/6/2013 FOB Destination
12/27/2012 1/7/2013 3,500 1/5/2013 1/7/2013 FOB Destination
Michael, Inc uses the passing of legal title for inventory recognition.
How many units should be included in Michael’s Inc’s inventory at December 31, 2012?
18,700 units
39,900 units
43,500 units
47,700 units

2.0 Financial Accounting and Reporting - 5.0 Inventories (Difficult)

Question 18
In your audit of the December 31, 2012, financial statements of John Inc, you found the
following inventory related transactions.

1 Goods costing P50,000 are on cosnignment with a customer. These goods were not

included in the physical count on December 31, 2012.
2 Goods costing P16,500 were delivered to John, Inc on January 4, 2013. The invoice
for these goods was received and recorded on January 10, 2013. The invoices and
the shipment was made on December 29, 2012, FOB shipping point.
3 Goods costing P21,640 were shipped FOB shipping point on December 31, 2012,
and were received by the customer on January 2, 2013. Although the sale was
recorded in 2012, these goods were included in the 2012 ending inventory.
4 Goods costing P8,640 were shipped to a customer on December 31, 2012, FOB
destination. These goods were delivered to the customer on January 5, 2013, and
were not included in the inventory. The sale was properly taken up in 2013.
5 Goods costing P8,600 shipped by a vendor under FOB destination term, were
received on January 3, 2013, and thus were not included in the physical inventory.
Because the related invoice was received on December 31, 2012, this shipment was
recorded as a purchase in 2012.
6 Goods valued at P51,000 were received from a vendor under consignment term.
These goods were included in the physical count.
7 John, Inc. recorded as a 2012 sale a P64,300 shipment of goods to a customer on
December 31, 2012, FOB Destination. This shipment of goods costing P37,500 was
received by the customer on January 5, 2013, and was not included in the ending
 inventory figure.
Prior to any adjustments, John, Inc.’s ending inventory is valued at P445,000 and the reported
net income for the year is P1,648,000.
John’s Inc December 31, 2012 inventory should be increased by
66,000
61,640
40,000
8,000

SOLUTION:

  Inventory, 2012 Net

12/31/2012 Income
Per client 445,000 1,648,000
a. Goods on consignment with a customer 50,000 50,000
b. Goods purchased FOB shipping point 16,500 -
c. Goods sold FOB shipping point (21,640) (21,640)
d. Goods sold FOB destination 8,640 8,640
e. Goods purchased FOB destination - 8,600
f. Goods received on consignment (51,000) (51,000)
g. Goods sold FOB destination 37,500 (26,800)
Per audit 485,000 1,615,800
Inventory per audit 485,000
Inventory per client 445,000
Adjustment 40,000
2.0 Financial Accounting and Reporting - 5.0 Inventories (Difficult)

Question 19
When determining the net realisable value of inventory, estimates must be made of the
following:

I Estimated costs of completion (if

any).
II Expected replacement cost.
III Expected selling price.
IV Estimated selling costs.

II and IV only; I, II, III and IV; I, II and III only; I, III and IV only.
2.0 Financial Accounting and Reporting - 5.0 Inventories (Difficult)

Question 20
Mishiel Company sells one product, which it purchases from various suppliers. The trial balance
at December 31, 2013 included the following accounts:

Sales (100,000 units at P150) 15,000,000

Sales discount 1,000,000
Purchases 9,300,000
Purchase discount 400,000
The inventory purchases during 2013 were as follows:

  Units Unit Cost Total cost

Beginning inventory, Jan 1 20,000 60 1,200,000
Purchases, quarter ended March 31 30,000 65 1,950,000
Purchases, quarter ended June 30 40,000 70 2,800,000
Purchases, quarter ended Sept 30 50,000 75 3,750,000
Purchases, quarter ended Dec 31 10,000 80 800,000
  150,000   10,500,000
Mishiel’ accounting policy is to report inventory in its financial statements at the lower of cost of
or net realizable value. Cost is determined under the FIFO.
Mishiel has determined that, at December 31, 2013, the replacement cost of its inventory was
P70 per unit and the net realizable value was P72 per unit. The normal profit margin is P10 per
unit.
What should Mishiel report as cost of goods sold for 2013?
6,500,000
6,900,000
6,300,000
6,700,000

SOLUTION:

September 30 (40,000 x 75) 3,000,000

December 31 (10,000 x 80) 800,000
FIFO cost 3,800,000
Net realizable value (50,000 x 72) 3,600,000
Inventory writedown 200,000
   
Inventory - Jan 1 at cost 1,200,000
Purchases 9,300,000
Purchase discount (400,000)
Goods available for sale 10,100,000
Inventory - Dec 31 at cost (3,800,000)
Cost of goods sold beforewritedown 6,300,000
Loss on inventory writedown 200,000
Cost of goods sold after writedown 6,500,000
2.0 Financial Accounting and Reporting - 5.0 Inventories (Difficult)

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