ReSA

The Review School of Accountancy

Tel. No. 735-9807 & 734-3989

PRACTICAL ACCOUNTING 1 C.T.ESPENILLA

INVENTORY (PAS 2)

1. Marlin Company’s inventory at October 31, 2008 was P142,000 based on a physical count
of goods priced at cost and before any necessary adjustments relating to the following
 An invoice for P10,000 FOB shipping point was received and recorded
November 5. The invoice shows that the material was shipped October 31, but
the receiving report indicates receipt of goods on November 3.
 An invoice for P5,000 terms FOB destination was received and recorded
November 2. The receiving report indicates that the goods were received
November 5.
 An invoice for P8,000 was received and recorded October 27. The receiving
report attached to the invoice indicates that the shipment was received October
30 in satisfactory condition. Terms of shipment: FOB shipping point on
October 27.
 An invoice for P15,000, terms FOB destination, was received and recorded
November 5. The receiving report indicates that the merchandise was received
October 30.

What amount should Marlin report as inventory in its October 31, 2008 balance sheet?
a. 152,000 c. 165,000
b. 157,000 d. 180,000

2. In the annual audit of Bravo Co. at December 31, 2008, you found the following
transactions near the closing date:
 A P100, 000 special machines, fabricated to order for a customer, was finished
and specifically segregated in the back part of the shipping room on December
31, 2008. The customer was billed on that date and the machine was excluded
from inventory although it was shipped on January 4, 2009.
 Merchandise costing P28, 000 was received on January 3, 2009, and the
related purchase invoice was recorded on January 5. The invoice showed the
shipment was made on December 29, 2008, FOB destination.
 A packing case containing a product costing P34, 000 was standing in the
shipping room when the physical inventory was taken. It was not included in
the inventory, because it was marked “Hold for shipping instructions”. Your
investigations revealed that the customer’s order was dated December 18,
2008, but that the case was shipped and the customer was billed on January 8,
2009. The product was a stock item of your client.
 Merchandise received on January 6, 2009 costing P20, 000 was entered in the
purchase journal on January 31, it was not included in the inventory. The
invoice showed shipment was made FOB supplier’s warehouse on December
31, 2008.
 Merchandise costing P10, 000 was received on December 28, 2008, and the
invoice was not recorded. You located it in the hands of the purchasing agent;
it was marked on consignment and it was included in the inventory in the
inventory count.

As a result of the above transactions, by how much should inventory be adjusted

by?
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a. 44,000 c. 144,000
b. 54,000 d. 172,000

3. Marker Company has following information pertaining to its merchandise inventory as of

December 31, 2008:

Inventory on hand, including items received on consignment, P20,000 P200,000

Inventory purchased with buyback agreement 100,000
Merchandise in transit, FOB shipping point, excluding P5,000 freight 155,000
Merchandise in transit, Free Alongside the Vessel, including delivery cost
Alongside the vessel of P6,000, but excluding delivery cost
to customer of P3,000 250,000
Merchandise in transit, CIF excluding cost of insurance and freight, P8,000 175,000

What amount should Marker report as value of its inventory in its 2008 balance sheet?
a. 749,000 c. 760,000
b. 770,000 d. 876,000

4. On December 2, 2008, Hotel Manufacturing Co. purchased goods with a cash price of
P200,000. Some of the costs incurred in connection with the acquisition of the goods
were as follows: Import duties, P20,000; transportation costs, P10,000; and handling
costs, P5,000. These goods were received on December 31, 2008. In Hotel’s December
31, 2008 balance sheet, at what amount should these goods be included in the inventory?
a. 200,000 c. 215,000
b. 210,000 d. 235,000

5. Meadow Manufacturing Company incurred the following costs related to its manufacture
and distribution of its inventory for the month of December 31, 2008:

Cost of materials used, including the total costs of indirect

materials consumed in the production process of P20,000 P300,000
Costs of labor, including the total costs indirect for laborers
who were assigned in the production area, P35,000 400,000
Other indirect costs that were allocated on a reasonable basis 100,000
Costs of transport from factory to company’s stockroom 20,000
Storage costs 10,000
Administrative costs 45,000
Delivery costs 5,000

What amount should Meadow assign to inventory prior to distribution?

a. 765,000 c. 820,000
b. 775,000 d. 830,000

6. On October 1, 2008, Alpha Company consigned 50 freezers at a unit cost of P15,000 to

King Company for sale at P20,000 each. The company paid P20,000 in transportation
cost. On December 31, 2008, King reported the sale of 25 freezers and returned 10.
Transport costs paid by the consignee on the returned units was P4,000. Amount due to
the consignor was remitted on the same date. Commission rate as agreed upon was

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15%. What amount of inventory on consignment and net income related to the sold
units, respectively, should Alpha report on December 31, 2008?
a. 225,000 and 36,000 c. 231,000 and 32,000
b. 235,000 and 40,000 d. 375,000 and 44,000

7. On December 1, 2008, Lima Corp received 1,000 units of windbreakers on consignment

from Tango Corp. Tango Corp.’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 Lima. As of
December 31, 50 units were returned to the consignor and 200 units are still held by the
consignee. Commission rate was as agreed upon between contracting parties was 12%
on all sales to be made by Tango Corp. In its December 31, 2008 balance sheet, what
amount should Lima report as payable to consignee?
a. 1,318,000 c. 1,320,000
b. 1,500,000 d. 2,000,000

8. On June 1, 2008 Charlie Inc. sold merchandise with a list price of P200,000 to Romeo Inc.
on account. Charlie allowed trade discounts of 30%, 20% and 10%. Credit terms were
2/15, n/40 and sale was made FOB Shipping point. Charlie prepaid P4,000 of delivery
costs for Romeo as an accommodation. On June 3, 2008, Charlie received from Romeo
returned merchandise with an invoice price of P50,000 due to minor defects. On June 14,
2008, Romeo settled its account in full to Charlie. How much net cash remittance did
Charlie receive?
a. 49,784 c. 53,784
b. 60,760 d. 74,088

9. Lima Inc. specialized in the sale of IBM compatibles and software packages. It had the
following transactions with one of its suppliers:

Purchase of IBM compatibles P2,380,000

Purchase of commercial software packages 1,680,000
Purchase return and allowance 70,000
Purchase discount taken 23,800

Purchase were made throughout the year on terms 2/10, n/30. All returns and allowance
took place within 5 days of purchase and prior to any payment on account. Purchase
discount lost is:
a. 23,800 c. 56,000
b. 57,400 d. 79,800

10. F1 Company had 10,000 units of product A on hand at January 1, 2008 costing P40 each.
Purchases of product A during the month of January were as follows:

Date Units Unit Cost Total Cost

January 10 12,000 42 504,000
18 15,000 43 645,000
22 10,000 44 440,000
27 5,000 45 225,000
31 8,000 46 368,000

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A physical count on January 31, 2008 shows 16,000 units of Product A on hand. What is
the cost of the inventory at January 31, 2008 under FIFO?
a. 683,500 c. 698,000
b. 725,000 d. 736,000

11. Foxtrot Inc. presented the following information pertaining to its inventory transactions
for the month of January:

Date Units Unit Cost Total Cost

Jan. 1 Balance 20,000 10 P200,000
Jan. 15 Sales 15,000
Jan. 18 Purchase 20,000 11 220,000
Jan. 20 Purchase 15,000 12 180,000
Jan. 25 Sales 24,000
Jan. 30 Purchase 14,000 15 210,000
Jan. 31 Sales 10,000

Question 1: Using the moving average method, what amount of inventory should Foxtrot
report in its January 31, 2008 balance sheet?
a. 240,000 c. 260,000
b. 280,000 d. 300,000

Question 2: Using the First-in-first-out method, what amount of inventory should Foxtrot
report in its January 31, 2008 balance sheet?
a. 240,000 c. 260,000
b. 280,000 d. 282,000

12. The following information pertains to Golf Inc.’s inventory transactions for the year ended
December 31, 2008:

Date Particulars Units Unit Cost Total Cost

Jan. 1 Balance 200 P3,000 P600,000
Apr. 3 Purchase 300 3,200 960,000
Jul. 1 Purchase 300 3,300 990,000
Oct. 1 Purchase 200 3,400 680,000
Dec. 26 Purchase 200 3,500 700,000
Total

The company sold 400 units on June 25 and 500 units on December 10. What is the
weighted average cost of the inventory on hand as of December 31, 2008?
a. 920,000 c. 982,500
b. 990,000 d. 1,310,000

13. The following information pertains to the inventory of India Company at year-end:

Cost P600,000
Replacement cost 460,000
Net realizable value 500,000
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Net realizable value less normal profit 340,000

What is the correct valuation of inventory at year-end under PAS 2?

a. 600,000 c. 500,000
b. 460,000 d. 340,000

14. Information pertaining to the inventory of Paper Inc. as of December 31, 2008 are as
follows:
Alpha Beta Charlie
Historical cost P2,000,000 P2,500,000 P3,500,000
Estimated selling price 2,200,000 3,600,000 4,000,000
Estimated cost of disposal 300,000 800,000 600,000
Normal profit margin 440,000 720,000 800,000
Current replacement cost 2,500,000 3,000,000 2,700,000

Paper records losses that results from applying the Measurement Standards under PAS 2,
what amount should the inventory be valued on December 31, 2008?
a. 7,800,000 c. 8,000,000
b. 7,900,000 d. 8,100,000

15. Based on the physical inventory taken on December 31, 2008, MVP Company determined
its chocolate inventory on a FIFO basis at P5,200,000 with a replacement cost of
P5,000,000. MVP estimated that, after further processing costs of P2,400,000, the
chocolate could be sold as finished goods candy bars for P7,000,000. MVP’s normal profit
margin is 10% of sales. Under the lower of cost or NRV rule, what amount should MVP
report as chocolate inventory in its December 31, 2008 balance sheet?
a. 4,600,000 c. 5,000,000
b. 5,200,000 d. 4,800,000

16. The following information pertains to BPO Company at December 31, 2008:

Inventory, January 1 P1,400,000

Purchases during the year 6,600,000
Inventory, December 31, cost 1,200,000
Inventory, December 31, NRV 1,000,000

Before the year 2008, application of the lower of cost or NRV never produced an
allowance to writedown inventory at NRV.

What is the cost of goods sold assuming the company applies the lower of cost or NRV
rule using a loss account and valuation allowance account?
a. 6,800,000 c. 7,000,000
b. 8,000,000 d. 6,500,000

17. On January 1, 2008 King Corporation signed a three year noncancelable purchase
contract, which requires King to purchase a minimum of 5,000 units of a computer part
for the three year period from Art Supply Company at P200 per unit. During 2008, part
unexpectedly became obsolete. King had 2,500 units of this inventory at December 31,
2008, and believes that this part can be sold as scrap for P40 per unit.
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Question 1: What amount of probable loss from the purchase commitment should King
report in its 2008 income statement?
a. 480,000 c. 320,000
b. 400,000 d. 160,000

Question 2: What amount of probable loss form the purchase commitment should King
report in its 2008 income statement assuming the contract required Kin gto acquire a
minimum of 1,000 units per year?
a. 480,000 c. 320,000
b. 400,000 d. 160,000

18. Hang Company has a recent gross profit history 33 1/3%. The following data are
available from Hang’s accounting records for the three months ended March 31, 2008:

Inventory at 1/1/08, P600,000; Purchases P3,000,000; Sales, P4,000,000; Purchase

returns, P70,000; Freight in, P50,000; Sales returns, P100,000; Sales discounts,
P20,000; Purchase discounts, P30,000 and freight out P5,000.

Question 1: If the gross profit rate is based on sales, what is the estimated cost of
inventory at the end of 3 months ended March 31, 2008?
a. 625,000 c. 964,000
b. 950,000 d. 969,000

Question 2: If the gross profit rate is based on cost, what is the estimated cost of
inventory at the end of 3 months ended March 31, 2008?
a. 625,000 c. 964,000
b. 950,000 d. 969,000

19. Viva Company’s accounting records indicated the following information:

Inventory, January 1, 2008 P500,000

Purchases during the year 2,840,000
Sales during 2008 3,600,000
Sales returns 100,000
Sales allowances 50,000
Sales discounts 100,000
Purchase discounts 150,000
Purchase returns 60,000

A physical inventory was taken on December 31, 2008 and it resulted in an ending
inventory of P700,000. Viva’s gross profit on sales has remained constant at 35% in
recent years. Viva suspects that a new employee may have taken some of the
inventories.

At December 31, 2008, what is the estimated cost of missing inventory?

a. 0 c. 250,000
b. 225,000 d. 925,000

20. On September 30, 2008, a fire at Mill Company’s only warehouse caused severe damages
to its entire inventory. Based on recent history, Mill has a gross profit of 30% of net
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sales. The following information is available from Mill’s records for the nine months period
ended September 30, 2008:

Inventory, January 1, 2008 P550,000

Total purchases received and recorded from Jan. to date of fire 3,000,000
Total freight cost of goods purchased and received 60,000
Total credit memo received on goods purchased and received 200,000
Total discounts taken on purchases 80,000
Invoice received for goods purchased but still in transit shipped
on September 30, 2008, shipped FOB SP 120,000
Total sales delivered and recorded from Jan. to date of fire 3,600,000
Unrecorded sales invoice for goods delivered 300,000
Total sales returns accounted and recorded at the date of fire 160,000
Total sales discounts taken by customers on recorded sales 40,000

A physical count of inventory disclosed usable damage goods which were estimated to
have a salvage value of P50,000. Using the gross profit method, how much would be the
inventory loss?
a. 602,000 c. 782,000
b. 662,000 d. 832,000

21. Georgia Co.’s pricing structure has been established to yield a gross margin of 30%. He
following data pertain to the year ended December 31, 2008:

Sales P2,200,000
Inventory, 1/1 1,000,000
Purchases 800,000
Freight costs on purchases 20,000
Freight costs on sales 30,000
Inventory inside the company’s warehouse,
per actual count 12/31 160,000
Credit memo issued to customers for goods
returned and received 50,000
Credit memo issued to customers for merchandise
to be returned, 1/02/09 40,000
Sales discount 100,000

Georgia is satisfied that all sales and purchases have been fully and properly recorded.
How much would Georgia reasonably estimate as a shortage in inventory at December 31,
2008?
a. 343,000 c. 155,000
b. 183,000 d. 143,000

22. The records of Morning Company shows the following information for the current year:

Cost Retail
Beginning inventory 340,000 640,000
Purchases 4,500,000 7,300,000
Freight in 100,000
Purchase return 150,000 250,000
Purchase allowance 90,000
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Departmental transfer in 100,000 160,000

Net markup 150,000
Net markdown 500,000
Sales 6,600,000
Sales allowance 50,000
Sales returns 150,000
Employee discount 100,000
Spoilage and breakages 200,000

What is the amount of estimated ending inventory under conventional retain and average
cost retail respectively.
a. 480,000 and 512,000 c. 450,000 and 480,000
b. 480,000 and 450,000 d. 512,000 and 480,000

23. Evening Company uses the first-in-first-out retail method of determining the value of their
inventory. The following information is made available:

Cost Retail
Beginning inventory 600,000 1,500,000
Purchases 3,048,400 5,500,000
Freight in 80,000
Purchase returns 140,000 180,000
Mark-ups 600,000
Mark-up cancellations 100,000
Mark-downs 1,300,000
Mark-down cancellations 300,000
Sales 4,470,000
Sales returns 150,000
Sales discount 200,000
Employee discount 400,000

If the lower of cost or market is disregarded, what would be the estimated cost of ending
inventory?
a. 662,000 c. 896,000
b. 774,000 d. 992,000

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PRACTICAL ACCOUNTING 1 - INVENTORIES