Exercise 2.

3-1A (Inventoriable Costs)

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

Inventoriable? Amount
No. Items (column 3) (column 4)
1. Supplier’s gross price for raw materials, P 150,000 YES 150,000
2. Materials purchased from another supplier on extended credit amounting YES 550,000
to P 570,000. The price to be paid under normal credit term is P
550,000.
3. Invoice price of raw materials purchased amounting to P 180,000. YES 180,000
Quantity discounts of 10, 5 are allowed by supplier.
4. Materials purchased from a supplier amounting to P 616,000, inclusive of YES 550,000
12% VAT. The company is VAT registered and can claim this as an input
VAT.
5. Materials purchased from a supplier amounting to P 515,000, inclusive of YES 515,000
nonrecoverable purchase tax of P 15,000.
6. Cost of transporting raw materials to the business premises, P 5,000. YES 5,000
7. Import duties to authorities on import of raw materials to be used during YES 25,000
the manufacturing process, P 25,000.
8. Labor cost directly incurred in the processing of raw materials, P 420,000 YES 420,000
9. Normal amount of wasted labor, P 57,000 YES 57,000
10. Abnormal amount of wasted labor, P 69,000 NO

Exercise 2.3-1B (Inventoriable Costs)

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

Inventoriable? Amount
No. Items (column 3) (column 4)
1. Cost of transporting goods to customers on sale, P 2,500. NO
2. Non-recoverable purchase taxes charged to customers on sale, P 12,000 NO
3. Non-recoverable sales taxes, P 14,440. NO
4. Commission payable to salesmen on the sale of the goods, P 14,500. NO
5. Provision for bad and doubtful debts in relation to trade receivable, P NO
56,000.
6. Costs of the accounts department, P 140,000 NO
7. Head office costs relating to the overall management of the business, P NO
234,000.
8. Borrowing cost incurred on inventories that takes substantial amount of YES 122,000
time to create, P 122,000.
9. Storage cost for a manufacturing product, P 56,000 YES 56,000
10. Selling costs, P 45,600. NO
11. Non-production overhead costs of designing products for a specific YES 10,000
customer, P 10,000.
12. Storage cost of finished goods, P 23,000 NO
13. Fixed administration costs/overheads (rent of office), P 450,000 NO
14. Insurance on in-transit inventories, p 17,800 YES 17,800
15. Freight incurred when the inventories were returned and redelivered, P NO
34,100
16. Foreign exchange differences arising directly on the recent acquisition of NO
inventories invoiced in a foreign currency. The peso equivalent when
acquired is P 567,000 and the peso equivalent of the merchandise when
paid is P 577,000.
Exercise 2.3-2A (Computation of Correct Amount of Inventory)
(Adapted from Intermediate Accounting Textbook)
Amiable Company provided the following data at year end:

Items counted in the bodega 4,000,000

Items included in the count specifically segregated per sales contract 100,000
Items in 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. Freight is paid by the seller 300,000
Items shipped today, invoice mailed, FOB shipping point 250,000
Items shipped today, invoice mailed, FOB destination 150,000
Items currently being used for window display 200,000
Items on counter for sale 800,000
Items in receiving department, refused by us because of damage 180,000
Items included in count, damaged and unsalable 50,000
Items in the shipping department 250,000

SOLUTION:
Items Amount Included Explanation
Items counted in the bodega 4,000,000 4,000,000
Items included in the count specifically Seller. Segregated per sales
segregated per sales contract 100,000 (100,000) contract. Assumed included among
the items counted in the bodega.
Items in receiving department, returned by Seller. In good condition, already in
customer, in good condition 50,000 50,000 the receiving department (returns)
Items ordered and in the receiving department, Buyer. Already received by the
invoice not received 400,000 400,000 receiving department
Items ordered, invoice received but goods not Buyer. Term is FOB Destination;
received. Freight is paid by the seller 300,000 - still in transit (not yet received)
Items shipped today, invoice mailed, FOB Seller. Already shipped. Title to
shipping point 250,000 - goods is already with the buyer
Items shipped today, invoice mailed, FOB Seller. Title to goods is still with the
destination 150,000 150,000 seller.
Items currently being used for window display 200,000 200,000
Items on counter for sale 800,000 800,000
Items in receiving department, refused by us Buyer. Refused to accept upon
because of damage 180,000 - delivery. (returns)
Items included in count, damaged and 50,000 (50,000) Damaged and unsalable. Assumed
unsalable to be included among the items
counted in the bodega.
Items in the shipping department 250,000 250,000 It is the shipping department and
not at the shipping point of the
seaport.
Correct amount of inventory 5,700,000

Required:
Compute the correct amount of inventory.

Exercise 2.3-2B (Computation of Correct Amount of Inventory)

(Adapted from Intermediate Accounting Textbook)
Natal Company provided the following information:

Materials 1,400,000
Advances for materials ordered 200,000
Goods in process 650,000
Unexpired insurance on inventories 60,000
Advertising catalogs and shipping cartons 150,000
Finished goods in factory 2,000,000
Finished goods in company-owned retail store, including 50% profit on cost 750,000
Finished goods in hands of consignee 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 P 30,000 330,000
Goods held on consignment, at sales price, cost P 150,000 200,000

Required:
Compute the correct amount of inventory.

SOLUTION:
Items Amount Included Explanation
Materials 1,400,000 1,400,000
Advances for materials ordered 200,000 - Advances to Suppliers
Goods in process 650,000 650,000
Unexpired insurance on inventories 60,000 - Prepayments
Advertising catalogs and shipping cartons 150,000 - Supplies
Finished goods in factory 2,000,000 2,000,000
Finished goods in company-owned retail store,
including 50% profit on cost 750,000 500,000 Cost = P 750,000 / 150%
Finished goods in hands of consignee
including 40% profit on sales 400,000 240,000 Cost = P 400,000 x 60% cost rate
Finished goods in transit to customers, Seller. Still owned by seller
shipped FOB destination, at cost 250,000 250,000 because of FOB Destination term
Finished goods out on approval, at cost 100,000 100,000 Seller. Still owned by the seller.
Unsalable finished goods, at cost 50,000 - Unsalable - exclude
Office supplies 40,000 - Supplies
Materials in transit shipped FOB shipping point, Buyer. Title to materials is with
excluding freight of P 30,000 330,000 360,000 the buyer because of FOB
shipping point term. Freight is
included. (P 330,000 + P 30,000)
Goods held on consignment, at sales price,
cost P 150,000 200,000 - Consignee
Correct amount of inventory 5,500,000

Exercise 2.3-5A (Average Method)

(Adapted from Auditing Textbook)
Records of the Gladiator New Products Company show the following data relative to Product 143:

Date Transactions Quantity Unit Cost Total Cost

Apr. 01 Balance 20,000 P 10.00 P 200,000
Apr. 02 Purchase 30,000 P 12.00 360,000
Apr. 04 Sale 25,000
Apr. 10 Purchase 15,000 P 14.00 210,000
Apr. 15 Sale 21,000
Apr. 17 Sales return 1,000
Apr. 28 Purchase 20,000 P 16.76 335,000

Based on the above date, compute the following:

1. Using the weighted average method, how much is the cost of inventory at the end of April?
2. Using the weighted average method, how much is the cost of goods sold in April?
3. Using the moving average method, how much is the cost of inventory at the end of April?
4. Using the moving average method, how much is the cost of goods sold in April?
5. Using the perpetual FIFO method, how much is the cost of inventory at the end of April?
6. Using the perpetual FIFO method, how much is the cost of goods sold in April?
7. Using the periodic FIFO method, how much is the cost of inventory at the end of April?

SOLUTION:
1. Using the weighted average method, how much is the cost of inventory at the end of April?

SOLUTION:
RECEIVED ISSUED
Date Transactions Quantity Unit Total Cost Quantity
Cost
Apr. 01 Balance 20,000 P 10.00 P 200,000
Apr. 02 Purchase 30,000 P 12.00 360,000
Apr. 04 Sale 25,000
Apr. 10 Purchase 15,000 P 14.00 210,000
Apr. 15 Sale 21,000
Apr. 17 Sales return (1,000)
Apr. 28 Purchase 20,000 P 16.76 335,000
TOTAL 85,000 P 1,105,000 45,000
Issued/Sold (45,000)
Inventory ending 40,000
Multiply by WA unit cost* P 13 P 13
Cost of Inventory, end P 520,000
Cost of Sales No. 1 P 585.000
No. 2

*WA unit cost = P 1,105,000 total GAFS / 85,000 units = P 13 per unit

2. Using the weighted average method, how much is the cost of goods sold in April?

3. Using the moving average method, how much is the cost of inventory at the end of April?

SOLUTION:
RECEIVED ISSUED BALANCE
Date Transactions Quantity UC TC Quantity UC TC Quantity UC TC
Apr. 01 Balance 20,000 10.00 200,00 20,000 10.00 200,000
0
Apr. 02 Purchase 30,000 12.00 360,00 50,000 11.00 560,000
0
Apr. 04 Sale 25,000 11.20 280,000 25,000 11.20 280,000
Apr. 10 Purchase 15,000 14.00 210,00 40,000 12.25 490,000
0
Apr. 15 Sale 21,000 12.25 257,250 19,000 12.25 232,750
Apr. 17 Sales return (1,000) 12.25 (12,250) 20,000 12.25 245,000
Apr. 28 Purchase 20,000 16.76 335,00 40,000 14.50 580,000
0
525,000 No. 3
No. 4
4. Using the moving average method, how much is the cost of goods sold in April?

5. Using the perpetual FIFO method, how much is the cost of inventory at the end of April?

SOLUTION:
RECEIVED BALANCE
Date Transactions Quantity UC TC Quantity UC TC
Apr. 28 Purchase 20,000 16.76 335,00 20,000 16.76 335,000
0
Apr. 10 Purchase 15,000 14.00 210,00 15,000 14.00 210,000
0
Apr. 02 Purchase 30,000 12.00 60,000 5,000 12.00 60,000
40,000 605,000

6. Using the perpetual FIFO method, how much is the cost of goods sold in April?

SOLUTION:
RECEIVED BALANCE
Date Transactions Quantity UC TC Quantity UC TC
Apr. 02 Purchase 30,000 12.00 60,000 25,000 12.00 300,000
Apr. 01 Balance 20,000 10.00 200,00 20,000 10.00 200,000
0
45,000 500,000

7. Using the periodic FIFO method, how much is the cost of inventory at the end of April?

SOLUTION:
Same as in number (5). Periodic FIFO and perpetual FIFO will give the same cost of ending inventory

Exercise 2.3-7A (Determining LCNRV)

(Adapted from Intermediate Accounting Textbook)
Prime Company manufactures and sells four products. The inventories of which are priced at cost or net realizable
value whichever is lower. A normal profit of 30% is usually maintained on each product.

Original Cost to Estimated Normal Net

Product Cost Dispose Selling Price Selling Price Realizable
Value
1 700 150 800 700 650 650
2 475 205 950 950 745 475
3 255 50 300 350 250 250
4 450 260 1,000 900 740 450

Required:
Determine the unit value for each product applying the LCNRV in measuring inventory. P1,825

Exercise 2.3-7B (Methods of Applying LCNRV)

(Adapted from Intermediate Accounting Textbook)
Fruity Veggie Company carried five items in inventory. The following per unit data relate to these items at the end of
first year of operations.
Cost LCNRV
Frozen
Pomelo 40,000 60,000
Pineapple 50,000 55,000
Mango 25,000 20,000

Canned
Mixed Fruits 45,000 36,000
Mixed Vegetables 47,500 46,000

Required: Calculate the value of the inventory under the following approaches:
A. The LCNRV is applied to the individual inventory item.
B. The LCNRV is applied to the inventory major groups.
C. The LCNRV is applied to the total inventory.

SOLUTION:
Lower of Cost or Net Realizable Value
Cost LCNRV Individual Major Total
Items Groups Inventory
Frozen
Pomelo 40,000 60,000 40,000
Pineapple 50,000 55,000 50,000
Mango 25,000 20,000 20,000
Total frozen 115,000 135,000 115,000

Canned
Mixed Fruits 45,000 36,000 36,000
Mixed Vegetables 47,500 46,000 46,000
Total canned goods 92,500 82,000 82,000

Total 207,500 217,000 192,000 197,000 207,500

Exercise 2.3-9A (Computing the Estimated Inventory)

(Adapted from Intermediate Accounting Textbook)
Fiesta Company uses the gross profit method to estimate inventory for monthly reporting purposes. Presented below
is information for the month of May.

Inventory, May 1 320,000

Purchases (gross) 1,280,000
Freight-in 60,000
Sales 2,000,000
Sales Returns 140,000
Purchase Discounts 24,000

Instructions:
1. Compute the estimated inventory at May 31, assuming that the gross profit rate is 25% of sales.
2. Compute the estimated inventory at May 31, assuming that the gross profit rate is 25% of cost.

SOLUTION:
1. Computation of the estimated inventory at May 31, assuming that the gross profit rate is 25% of sales.
Inventory, May 1 320,000
Purchases (gross) 1,280,000
Purchase Discounts (24,000)
Freight-in 60,000
Goods available for sale 1,636,000
Cost of Sales
Sales 2,000,000
Sales Returns (140,000)
Net Sales 1,860,000
Multiply by cost rate (100% - 25%) 75% (1,395,000)
Estimated inventory at May 31 241,000

2. Computation of the estimated inventory at May 31, assuming that the gross profit rate is 25% of cost.

SOLUTION:
Inventory, May 1 320,000
Purchases (gross) 1,280,000
Purchase Discounts (24,000)
Freight-in 60,000
Goods available for sale 1,636,000
Cost of Sales
Sales 2,000,000
Sales Returns (140,000)
Net Sales 1,860,000
Divide by cost rate 125% 125% (1,488,000)
Estimated inventory at May 31 148,000
Exercise 2.3-9B (Construction of Accounts to Compute the Estimated Inventory)
(Adapted from Reviewer in Auditing Practice)
Aloha Company prepares monthly income statements. A physical inventory is taken only at year end; hence, month-
end inventories must be estimated. All sales are made on account. The rate of mark-up on cost is 50%. The
following information relates to the month of June 2020:

Accounts receivable, June 1, 2020 100,000

Accounts receivable, June 30, 2020 150,000
Collection of accounts receivable during June 2020 250,000
Inventory, June 1, 2020 180,000
Purchases of inventory during June 2020 160,000

Given Accounts Receivable

Dr. Cr.
Accounts receivable, June 1, 2020 100,000 100,000
Credit sales during June 2020 (squeeze amount) ? 300,000
Collection of accounts receivable during June 2020 250,000 250,000
Accounts receivable, June 30, 2020 150,000 150,000

Inventory, June 1, 2020 180,000

Purchases of inventory during June 2020 160,000
Cost of goods available for sale 340,000
Less: Cost of sales
Sales during June 2020 (all credit sales) 300,000
Divide by sales rate (GPR based on cost) 150% 200,000
Cost of Inventory, June 30, 2020 140,000
(Letter B)

Exercise 2.3-9D (Computation of Inventory Fire Loss)

(Adapted from Intermediate Accounting Textbook)
On the night of September 30, 2020, a fire destroyed most of the merchandise inventory of Paragon Company. ll
goods were completely destroyed except for partially damaged goods that normally sell for P 100,000 and that had
an estimated net realizable value of P 25,000 and undamaged goods that normally sell for P 60,000.

Inventory, January 1, 2020 660,000

Net purchases, January 1 through September 30, 2020 4,240,000
Net sales, January 1 through September 30, 2020 5,600,000

2019 2018 2017 TOTAL

Net Sales 5,000,000 3,000,000 1,000,000 9,000,000
Cost of goods sold 3,840,000 2,200,000 710,000 6,750,000

Instructions:
Compute the amount of fire loss to be recognized on September 30, 2020

Step 1 – Compute first the cost rate based on previous accounting records
2018 2017 2016 Total
Net Sales (NS) 5,000,000 3,000,000 1,000,000 9,000,000
Cost of goods sold (COGS) 3,840,000 2,200,000 710,000 6,750,000

Cost rate = COGS / NS = P 6,750,000/P 9,000,000 = 75%

Step 2 – Compute the fire loss, 9/30/2019

Inventory, January 1, 2019 660,000

Net purchases, January 1 through September 30, 2019 4,240,000
Cost of goods available for sale, 1/1 to 9/30/2019 4,900,000
Less: Cost of sales
Net sales, January 1 through September 30, 2019 5,600,000
Multiply by cost rate (based on sales) 75% 4,200,000
Estimated inventory on date fire, 9/30/2019 700,000
Less: Undamaged goods (not counted as fire loss)
P 60,000 normal selling price x 75% cost rate 45,000
Partially damaged goods (not counted as loss) at NRV 25,000 70,000
Fire loss at 9/30/2019, date of fire 630,000

Exercise 2.3-10A (Conservative Approach and Average Cost Approach)

(Adapted from Intermediate Accounting Textbook)
Empress Company used the retail inventory method to approximate the ending inventory.

The following information is available for the current year:

Cost Retail
Beginning Inventory 650,000 1,200,000
Purchases 9,000,000 14,700,000
Freight-in 200,000
Purchase returns 300,000 500,000
Purchase Allowances 150,000
Departmental transfer-in 200,000 300,000
Net markup 300,000
Net markdown 1,000,000
Sales 9,500,000
Sales Discounts 100,000
Employee Discounts 500,000
Estimated normal shoplifting losses 600,000
Estimated normal shrinkage 400,000

Instructions:
1. Compute the estimated cost of ending inventory using the conservative approach
2. Compute the estimated cost of ending inventory using the average cost approach

Conservative
Approach Average Cost Approach
Cost Retail Cost Retail
Beginning inventory 650,000 1,200,000 650,000 1,200,000

Purchases 9,000,000 14,700,000 9,000,000 14,700,000

Freight-in 200,000 200,000
Purchase Returns (300,000) (500,000) (300,000) (500,000)
Purchase Allowances (150,000) (150,000)
Departmental transfer-in 200,000 300,000 200,000 300,000
Net markup 300,000 300,000
Cost of goods available for sale 9,600,000 16,000,000
COST RATE – Conservative
P 9,600,000/P 16,000,000 = 60%
(1,000,000)
Net markdown (1,000,0000)
Cost of goods available for sale 9,600,000 15,000,000 9,600,000 15,000,000
COST RATE – Average
P 9,600,000/P 15,000,000 = 64%

Less: Sales 9,500,000 9,500,000

Employee Discount 500,000 500,000
Estimated normal shiplifting losses 600,000 600,000
Estimated normal shrinkage 400,000 11,000,000 400,000 11,000,000
Ending inventory, at retail price 4,000,000 4,000,000

ENDING INVENTORY AT COST:

Conservative (P 4,000,000 x 60%) 2,400,000
Average (P 4,000,000 x 64%) 2,560,000