Financial Accounting and Reporting AIRIVERA

Inventory
2017-003

Total Inventory
1. Air Co. provided you the following information for the purpose of
determining the amount of its inventory as of December 31, 2015:

Goods located at the warehouse 3,800,000

Goods located at the Sales Department 13,600,000
Goods in-transit purchased FOB destination 1,600,000
Goods in-transit purchased FOB shipping 2,100,000
point
Freight incurred under "freight prepaid" for 60,000
the goods purchased under FOB shipping point
Goods held on consignment from XYZ , Inc. 1,800,000

Requirement: How much is the total inventory of December 31, 2015?

Consigned Goods
2. Air Co. consigned goods costing P10,000 to XYZ, Inc. Transportation costs
of delivering the goods to XYZ totaled P2,000. Repair costs for goods
damaged during transportation totaled P500. To induce XYZ, Inc. in
accepting the consigned goods, Air Co. gave XYZ P1,000 representing an
advance commission. How much is the cost of consigned goods?

Correct inventory and accounts payable

3. On December 31, 2015, Air Co. has a balance of P160,000 in its inventory
account determined through physical count and a balance of P100,000 in its
accounts payable account. The balances were determined before any
necessary adjustment for the following:
a. Merchandise costing P10,000 shipped FOB shipping point from a vendor on
December 30, 2015, was received and recorded on January 5, 2016
b. A package containing a product costing P50,000 was standing in the
shipping area when the physical inventory was conducted. This was not
included in the inventory because it was marked “Hold for shipping
instructions”. The sale order was dated December 17 but the package was
shipped and the customer was billed on January 3, 2016
c. Goods in the shipping area were included in inventory because shipment
was not made until January 4, 2016. The goods billed to the customer
FOB shipping point on December 30, 2015, had a cost of P20,000
d. Goods shipped FOB destination on December 27, 2015 from vendor to Air
Co. was received on January 6, 2016. The invoice cost of P30,000 was
recorded on December 31, 2015 and included I the count as “goods in
transit”

Requirement: Determine the adjusted balances 1) inventory and 2) accounts

payable as of December 31, 2015.

Inventories under financing agreement, installment sales

4. The records of Air Co. show the following:

Goods sold on installment basis to XYZ, Inc. 750,000

title to the goods is retained by Air Co.
until full payment is made. XYZ, Inc. took
possession of the goods
Goods sold to Alpha Co. for which Air Co. 680,000
has signed an agreement to repurchase the
goods sold at a set price that covers all
costs related to the inventory
Goods sold where large returns are 270,000
predictable
Goods received from Beta Co. for which an 580,000
agreement was signed requiring Air Co. to
replace such goods in the near future

How much is included as part of inventory?

Albert I. Rivera, CPA,MBA,CRA 1

Bill hold and Lay away
5. The following are among the transactions of AIR Co. during the year:
 Purchased of goods costing P10,000 from XYZ, Inc. Billing was received
although delivery was delayed per request of AIR Co. The goods
purchased were segregated and ready for delivery on demand.
 Purchased goods costing P25,000 from Alpha Corp. on a lay away sale
agreement. The goods were not yet delivered until after AIR makes the
final payment on the purchase price. AIR Co. made total payments of
P10, 000 during the year.

How much of the goods purchased above will be included in AIR’s year-end
inventory?

6. Perpetual vs Periodic
a. Purchase on inventory on account P100,000
b. Payment of freight on purchases P10,000
c. Return goods purchased to supplier P5,000
d. Sale of inventory account for P100,000. Gross profit on selling price
is 20%.
e. Goods sold for P10,000 was returned by a customer. Gross profit on
selling price is 20%
f. Physical count of inventory at end of period, P35,000. The beginning
inventory is P2,000

Requirements:
a. Journalize the above transactions
b. Assume that the physical revealed a balance of P30,000. Determine the
inventory shortage/overage

Perpetual Periodic

Trade and Cash Discounts

7. An entity purchase inventory with a list price of P10,000 on account under
credit terms of 20%, 10% 2/10, n/30

Gross Method Net Method

Albert I. Rivera, CPA,MBA,CRA 2

Cost Formulas
8. Air Co. is a wholesaler of guitar picks. The activity for product “Pick X”
during August are shown below:

Date Transaction Units Unit Cost Total Cost

1 Inventory 2,000 36.00 72,000
7 Purchase 3,000 37.20 111,600
12 Sales 4,200
13 Sales Return 600
21 Purchase 4,800 38.00 182,400
22 Sales 3,800
29 Purchase 1,900 38.60 73,340
Purchase 300 38.60 (11,580)
30
Return

Requirements: Compute for a) ending inventory and cost of goods sold under
the following cost formulas:
a. FIFO – periodic
b. FIFO – perpetual
c. Weighted average – periodic (simple weighted average)
d. Weighted average – perpetual (moving weighted average)

Write-down of inventories
9. AIR Co. buys and sells products A & B. the following unit costs are
available for the inventory as of December 31, 2015: (All costs are borne
by AIR Co.)

A B
Number of Units 2,000 3,000
Purchase cost per unit 100 200
Delivery cost from supplier 20 30
Estimated selling price 150 250
Selling costs 22 40
General and administrative 15 18

Compute for the valuation of products A and B in ABC’s December 31, 2015
statement of financial condition.

Write-down of raw materials

10. The raw materials inventory of AIR Co. on December 31, 2015 have a cost
of P10,000 and an estimated net realizable value of P8,000 immediately
after the balance sheet date the raw materials wer applied to production
and it was found out that the net realizable value of the finished goods
to which the raw materials were applied exceeds the production cost. As of
December 31, 2015, what amount of raw materials inventory should AIR Co.
report?

Purchase commitments
11. On January 1, 2015, AIR Co. signed a three year, non-cancelable
purchase contract, which allows AIR Co. to purchase up to 60,000 units of
a microchip annually from XYZ Co. at P25 per unit and guarantees a minimum
annual purchase of 15,000 units. At year-end, it was found out that the
goods are obsolete. AIR Co. had 10,000 units of this inventory at December
31, 2015 and believes these parts can be sold as scrap for P5 per unit.

a. Compute the loss on purchase commitment to be recognized on December

31, 2015.
b. Assume that the value of the goods increased to P30 per unit on
December 31, 2016 and that no inventory is on hand on that date.
Determine the gain on purchase commitment?

Albert I. Rivera, CPA,MBA,CRA 3

Gross Profit Rates
12. If GPR based on cost is 25%, what is the GPR based on sales?
13. If GPR based on sales is 20%, what is the GPR based on costs?

Cost Ratio
14. If the GPR based on sales is 20%, what is the cost ratio?
15. If the GPR based on cost is 25%, what is the cost ratio?

Gross Profit Based on Sales

16. On October 1, 2015, the warehouse of AIR Co. and all inventories
contained therein were damaged by flood. Off-site back up of database
shows the following information:

Inventory, Jan 1 14,500

Accounts payable, Jan 1 6,000
Accounts payable, Sept 30 3,000
Payments to suppliers 50,000
Freight-in 5,000
Purchase returns 2,500
Sales from Jan to Sept 75,000
Sales returns 5,000
Sales discounts 2,000
Gross Profit based on sales 20%

Additional information:
Goods in transit as of October 1, 2015 amounted to P2,000, cost of goods
out on consignment is P1,200 and materials damaged by flood can be sold at
salvage value of P500.

Compute for the inventory loss due to the flood?

Gross Profit Based on Cost

17. On October 1, 2015, the warehouse of AIR Co. and all inventories
contained therein were razed by fire. Off-site back up of database shows
the following information:

Inventory, Jan 1 14,500

Net Purchases 75,000
Net Sales from Jan to Sept 96,000
Gross Profit Rate based on sales 20%

Compute for the inventory loss due to the fire?

Cost of goods sold

18. You were engaged to assist in reconstructing AIR Co.’s records after an
operating system crashed on August 1. AIR Co. does not have an established
business continuity plan or a disaster recovery program and only the
following information has been determined:

Increase in Inventory 16,000

Decrease in Accounts Payable 8,000
Payments to Suppliers 70,000

Compute for the cost of goods sold?

Albert I. Rivera, CPA,MBA,CRA 4

Accounts of a manufacturing entity
19. The work in progress inventories of AIR Manufacturing, Inc. were
completely destroyed by fire on June 1, 2015. Amounts for the following
accounts have been established.

1-Jan 2015 1-Jun 2015

Accounts Payable 78,000 90,000
Raw Materials 10,000 12,000
Work-In-Process 40,000 ?
Finished Goods 46,000 58,000

The following additional information was determined:

a. Payments to suppliers for purchases on account, P40,000
b. Freight on purchases, P2,000
c. Purchase returns, P5,000
d. Direct Labor, P32,000
e. Production overhead, P12,000
f. Sales from January 1 to May 31, P150,000
g. Sales returns, P30,000
h. Sales discounts, P10,000
i. Gross profit rate based on sales, 25%

Compute for the work in process destroyed by fire?

Retail Method
20. Presented below is information pertaining to AIR Co.

1-Jan 2015 1-Jun 2015

Inventory, Jan 1 8,700 14,000
Purchases 55,300 80,300
Freight-in 2,000 -
Purchase Discounts 500 -
Purchase Returns 5,200 8,600
Departmental 1,000 1,500
Transfer – In
Departmental 800 1,200
Transfer - Out
Mark-up 6,000
Mark-up 2,000
Cancellation
Markdown 12,000
Markdown 3,000
Cancellation
Abnormal Spoilage 5,000 7,000
Sales 43,800
Sales Returns 2,500
Sales Discount 1,000
Employee Discount 500
Normal Spoilage 200

a. Compute for 1) cost of goods sold and 2) ending inventory using the
Average Cost Method.
b. Compute for 1) cost of goods sold and 2) ending inventory using the
FIFO Cost Method.

Albert I. Rivera, CPA,MBA,CRA 5

Costs of purchase
21. AIR Co., imported goods from a foreign supplier. Costs incurred by AIR
include the following:

Purchase Price 100

Import Duties 10
Taxes (Recoverable) 13
Transportation & 5
Handling Cost
Commission to Broker 2

How much is the cost of purchase of the imported goods?

Purchase in lump sum

22. AIR Co. acquired a track of land for P1,000,000. The land was developed
and subdivided into residential lots at an additional cost of P200,000.
Although the subdivided lots are relatively equal in sizes, they were
offered at different sales prices due to differences in terrain and
locations. Information on the subdivided lots are shown below:

Lot Group No. of Lots Price Per Lot

A 4 400,000
B 10 200,000
C 15 160,000

Compute the allocated costs for Lots A, B & C?

Albert I. Rivera, CPA,MBA,CRA 6