Inventories

PROBLEM NO. 1
In connection with your audit of the Alcala Manufacturing Company, you reviewed its inventory
as of December 31, 2006 and found the following items:

(a) A packing case containing a product costing P100,000 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. The customers order was dated December 18, but the
case was shipped and the costumer billed on January 10, 2007.

(b) Merchandise costing P600,000 was received on December 28, 2006, and the invoice was
recorded. The invoice was in the hands of the purchasing agent; it was marked On
consignment.

(c) Merchandise received on January 6, 2007, costing P700,000 was entered in purchase register
on January 7. The invoice showed shipment was made FOB shipping point on December 31,
2006. Because it was not on hand during the inventory count, it was not included.

(d) A special machine costing P200,000, fabricated to order for a particular customer, was
finished in the shipping room on December 30. The customer was billed for P300,000 on that
date and the machine was excluded from inventory although it was shipped January 4, 2007.

(e) Merchandise costing P200,000 was received on January 6, 2007, and the related purchase
invoice was recorded January 5. The invoice showed the shipment was made on December 29,
2006, FOB destination.

(f) Merchandise costing P150,000 was sold on an installment basis on December 15. The
customer took possession of the goods on that date. The merchandise was included in inventory
because Alcala still holds legal title. Historical experience suggests that full payment on
installment sale is received approximately 99% of the time.

(g) Goods costing P500,000 were sold and delivered on December 20. The goods were included
in the inventory because the sale was accompanied by a purchase agreement requiring Alcala to
buy back the inventory in February 2007.

Question:
Based on the above and the result of your audit, how much of these items should be included in
the inventory balance at December 31, 2006?
a. P1,300,000 c. P1,650,000
b. P 800,000 d. P1,050,000

PROBLEM NO. 2
The Anda Company is on a calendar year basis. The following data were found during your
audit:

a. Goods in transit shipped FOB destination by a supplier, in the amount of P100,000, had been
excluded from the inventory, and further testing revealed that the purchase had been
recorded.

b. Goods costing P50,000 had been received, included in inventory, and recorded as a purchase.
However, upon your inspection the goods were found to be defective and would be immediately
returned.

c. Materials costing P250,000 and billed on December 30 at a selling price of P320,000, had
been segregated in the warehouse for shipment to a customer. The materials had been excluded
from inventory as a signed purchase order had been received from the customer. Terms, FOB
destination.

d. Goods costing P70,000 was out on consignment with Hermie Company. Since the monthly
statement from Hermie Company listed those materials as on hand, the items had been excluded
from the final inventory and invoiced on December 31 at P80,000.

e. The sale of P150,000 worth of materials and costing P120,000 had been shipped FOB point of
shipment on December 31. However, this inventory was found to be included in the final
inventory. The sale was properly recorded in 2005.

f. Goods costing P100,000 and selling for P140,000 had been segregated, but not shipped at
December 31, and were not included in the inventory. A review of the customers purchase order
set forth terms as FOB destination. The sale had not been recorded.

g. Your client has an invoice from a supplier, terms FOB shipping point but the goods had not
arrived as yet. However, these materials costing P170,000 had been included in the inventory
count, but no entry had been made for their purchase.

h. Merchandise costing P200,000 had been recorded as a purchase but not included as inventory.
Terms of sale are FOB shipping point according to the suppliers invoice which had arrived at
December 31.
Further inspection of the clients records revealed the following December 31, 2006 balances:
Inventory, P1,100,000; Accounts receivable, P580,000; Accounts payable, P690,000; Net sales,
P5,050,000; Net purchases, P2,300,000; Net income, P510,000.

QUESTIONS:
Based on the above and the result of your audit, determine the adjusted balances of following as
of December 31, 2006:

1. Inventory
a. P1,230,000 c. P1,550,000
b. P1,650,000 d. P1,480,000
2. Accounts payable
a. P710,000 c. P810,000
b. P540,000 d. P760,000

3. Net sales
a. P4,550,000 c. P4,730,000
b. P4,650,000 d. P4,970,000

4. Net purchases
a. P2,370,000 c. P2,150,000
b. P2,420,000 d. P2,320,000

5. Net income
a. P220,000 c. P540,000
b. P290,000 d. P550,000

PROBLEM NO. 3
Dasol Factory started operations in 2006. Dasol manufactures bath towels. 60% of the
production are Class A which sell for P500 per dozen and 40% are Class B which sell for
P250 per dozen. During 2006, 6,000 dozens were produced at an average cost of P360 per dozen.
The inventory at the end of the year was as follows:

220 dozens Class A @ P360 P 79,200

300 dozens Class B @ P360 108,000

QUESTIONS:
Using the relative sales value method, which management considers as a more equitable basis of
cost distribution, answer the following:

1. How much of the total cost should be allocated to Class A?

a. P1,296,000 c. P1,284,324
b. P1,620,000 d. P 925,714

2. How much of the total cost should be allocated to Class B?

a. P540,000 c. P 864,000
b. P875,676 d. P1,234,286

3. How much is the value of inventory as of December 31, 2006?

a. P187,200 c. P117,000
b. P187,946 d. P166,500
 4. How much is the cost of sales for the year 2006?
a. P1,972,800 c. P2,043,000
b. P1,993,500 d. P1,972,054

5. How much is the gross profit for the year 2006?

a. P242,200 c. P221,500
b. P406,500 d. P242,946

PROBLEM NO. 4
The Mangaldan Merchandising Company is a leading distributor of kitchen wares. The company
uses the first-in, first-out method of calculating the cost of goods sold. The following information
concerning two of the companys products is taken from the month of May:
PANS KETTLES
No of Unit cost No. of Unit cost
Units units
May 1, 10,000 P 60 6,000 P 40
beginning
inventory
Purchases:
May 15 14,000 65 9,000 P 42
May 25 6,000 75
Sales for the month 20,000 10,000
(@ P80) (@ P44)

On May 31, Mangaldans suppliers reduced their price from the last purchase price by the
following percentages:
Pans..25% Kettles20%

Accordingly, the company agreed to reduce selling prices by 15% on all items beginning June 1.
Mangaldan Merchandising Companys selling costs are calculated at 10% of selling price. Both
products have a normal profit of 30% on sales prices (after selling costs).

QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. Total cost of Pans as of May 31 is
a. P710,000 c. P600,000
b. P653,300 d. P612,000

2. Total cost of Kettles as of May 31 is

a. P210,000 c. P200,000
b. P206,000 d. P168,300

3. The inventory at May 31 should be valued at

a. P768,300 c. P920,000
b. P780,300 d. P890,000

4. The loss on inventory write down for the month of May is

a. P139,700 c. P29,300
b. P137,300 d. P27,600

5. The cost of sales, before loss on inventory write down, for the month of May is
a. P1,778,000 c. P1,797,700
b. P1,685,600 d. P1,658,000

PROBLEM NO. 5
The work-in-process inventories of Paraaque Company were completely destroyed by
fire on June 1, 2005. You were able to establish physical inventory figures as follows:

January 1, 2005 June 1, 2005

Raw materials P60,000 P120,000
Work-in-process 200,000 -
Finished goods 280,000 240,000
Sales from January 1 to May 31, were P546,750. Purchases of raw materials were
P200,000 and freight on purchases, P30,000. Direct labor during the period was
P160,000. It was agreed with insurance adjusters than an average gross profit rate of
35% based on cost be used and that direct labor cost was 160% of factory overhead.

REQUIRED:

Based on the above and the result of your audit, you are to determine:
1. Raw materials used
a. P290,000 b. P140,000 c. P260,000 d. P170,000

2. The total value of goods put in process

a. P786,000 b. P600,000 c. P630,000 d. P430,000

3. The value of goods manufactured and completed as of June 1, 2003

a. P365,000 b. P315,388 c. P445,000 d. P420,000

4. The work in process inventory destroyed as computed by the adjuster

a. P314,612 b. P185,000 c. P366,000 d. P265,000
PROBLEM NO. 6

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

Purchases P 102,800
Purchase discounts 10,280
Freight-in 15,420
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?

Answer: P 118,220

PROBLEM NO. 7

During 2011, Kam Co. began offering its goods to selected retailers on a consignment basis. The
following information was derived from Kam's 2011 accounting records:
Beginning inventory P122,000
Purchases 540,000
Freight in 10,000
Transportation to consignees 5,000
Freight out 35,000
Ending inventory-held by Kam 145,000
Ending inventory-held by consignees 20,000
In its 2011 income statement, what amount should Kam report as cost of goods sold?

Answer: P 512,000

PROBLEM NO. 8

The following information was obtained from Smith Co.:

Sales P275,000
Beginning inventory 30,000
Ending inventory 18,000
Smith's gross margin is 20%. What amount represents Smith purchases?

Answer: P 208,000

PROBLEM NO. 9
Trans Co. uses a periodic inventory system. The following are inventory transactions for the
month of January:
1/1 Beginning inventory 10,000 units at P3
1/5 Purchase 5,000 units at P4
1/15 Purchase 5,000 units at P5
1/20 Sales at $10 per unit 10,000 units
Trans uses the average pricing method to determine the value of its inventory. What amount
should Trans report as cost of goods sold on its income statement for the month of January?

Answer: P 37,500

PROBLEM NO. 10

On December 28, 2011, Kerr Manufacturing Co. purchased goods costing P50,000. The terms
were F.O.B. destination. Some of the costs incurred in connection with the sale and delivery of
the goods were as follows:
Packaging for shipment P1,000
Shipping 1,500
Special handling charges 2,000
These goods were received on December 31, 2011. In Kerr's December 31, 2011, balance sheet,
what amount of cost for these goods should be included in inventory?

Answer: P50,000