QUIZ 4 INVENTORIES AND INVENTORY ESTIMATION.

WRITE YOUR ANSWERS ON THE ANSWER SHEET PROVIDED AND UPLOAD IT BACK IN
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PART 1 – INVENTORIES (20 PTS)

1. A VAT-registered entity purchases inventory. The invoice price of the inventory includes payment
for VAT. The entity should
a. include the VAT paid as part of the cost of the inventory.
b. exclude the VAT paid and record it under the VAT payable account.
c. exclude the VAT paid and record it under the Input VAT account.
d. ignore the VAT payment and disclose it only in the notes to the financial statements.

Use the following information for the next two questions:

During 2004, Elway Corporation transferred inventory to Howell Corporation and agreed to
repurchase the merchandise early in 2005. Howell then used the inventory as collateral to borrow from
Norwalk Bank, remitting the proceeds to Elway. In 2005 when Elway repurchased the inventory,
Howell used the proceeds to repay its bank loan.

2. This transaction is known as a(n)

a. consignment.
b. installment sale.
c. assignment for the benefit of creditors.
d. product financing arrangement.

3. On whose books should the cost of the inventory appear at the December 31, 2004 balance sheet
date?
a. Elway Corporation
b. Howell Corporation
c. Norwalk Bank
d. Howell Corporation, with Elway making appropriate note disclosure of the transaction

4. Eller Co. received merchandise on consignment. As of January 31, Eller included the goods in
physical inventory but did not record the transaction. The effect of this on its financial statements
for January 31 would be
a. net income or profit, current assets, and retained earnings were overstated.
b. net income or profit was correct and current assets were understated.
c. net income or profit and current assets were overstated and current liabilities were
understated.
d. net income or profit, current assets, and retained earnings were understated.
5. Dawn Co. purchased goods with invoice price of ₱3,000 on account on December 27, 20x1. The
related shipping costs amounted to ₱50. The seller shipped the goods on December 31, 20x1. Dawn
Co. received the goods on January 2, 20x2 and settled the account on January 5, 20x2. How much
is the net cash payment to the supplier if the terms of the shipment are FOB destination, freight
collect?
a. 3,050 b. 3,000 c. 2,950 d. 0

Use the following information for the next two questions:

On December 31, 20x1, ABC Co. has a balance of ₱240,000 in its inventory account, determined
through physical count, and a balance of ₱90,000 in its accounts payable account. The balances were
determined before any necessary adjustment for the following:
a. Segregated goods in the shipping area marked “Bill and hold sale” were included in inventory
because shipment was not made until January 4, 20x2. The goods were sold to the customer, on a
“bill and hold” sale, for ₱20,000 on December 30, 20x1. The customer accepted the billing on that
day. The cost of the goods is ₱10,000. The goods were already packed and ready for shipment.
Both ABC and the buyer acknowledged the shipping term.
b. A package containing a product costing ₱80,000 was standing in the shipping area when the
physical inventory was conducted. This was included in the inventory although it was marked
“Hold for shipping instructions.” The sale order was dated December 17, 20x1 but the package
was shipped and the customer was billed on January 4, 20x2.
c. Merchandise costing ₱10,000, shipped FOB destination from a vendor on December 30, 20x1, was
received and recorded on January 5, 20x2.
d. Goods shipped F.O.B. shipping point on December 27, 20x1, from a vendor to ABC Co. were
received on January 6, 20x2. The invoice cost of ₱30,000 was recorded on December 31, 20x1 and
included in the count as “goods in-transit.”

6. How much is the adjusted balance of inventory?

a. 240,000 b. 230,000 c. 160,000 d. 200,000

7. How much is the adjusted balance of accounts payable?

a. 90,000 b. 80,000 c. 60,000 d. 100,000

8. The records of ABC Co. show the following:

a. Goods sold on an installment basis to XYZ, Inc., title to the goods was
retained by ABC Co. until full payment is made. XYZ, Inc. took possession of
150,000
the goods.
b. Goods sold to Alpha Co., for which ABC Co. has the option to repurchase the
goods sold at a set price that covers all costs related to the inventory. 280,000
c. Goods sold under a “sale on trial” arrangement 70,000
d. Goods received from Beta Co. for which an agreement was signed requiring
ABC Co. to replace such goods in the near future. 50,000

How much is included as part of inventory?

a. 50,000 b. 120,000 c. 270,000 d. 330,000
9. ABC Co. uses the periodic inventory system. In the current year, ABC’s ending inventory is
understated by ₱20,000. Which of the following statements is correct?
a. ABC’s cost of goods sold is understated by ₱20,000.
b. ABC’s gross income is understated by ₱20,000.
c. ABC’s net purchases are understated by ₱20,000.
d. ABC’s profit is overstated by ₱20,000.

10. On January 1, 20x1 Plaka Co. acquired goods for sale in the ordinary course of business for
₱250,000, excluding ₱5,000 refundable purchase taxes. The supplier usually sells goods on 30 days’
interest-free credit. However, as a special promotion, the purchase agreement for these goods
provided for payment to be made in full on December 31, 20x1. Transport charges of ₱2,000 were
paid on January 1, 20x1. An appropriate discount rate is 10 per cent per year. How much is the
initial cost of the inventories?
a. 229,273 b. 224,727 c. 250,000 d. 257,000

11. Ciano Co. acquired a tract of land for ₱2,000,000. The land was developed and subdivided into
residential lots at an additional cost of ₱200,000. Although the subdivided lots are relatively equal
in sizes, they were offered at different sales prices due to differences in terrain. Information on
the subdivided lots is shown below:
Lot group No. of lots Price per lot
A 4 480,000
B 10 240,000
C 15 192,000

During the year, 2 lots from the A group, 3 lots from the B group and 12 lots from the C group were
sold. How much gross income is recognized during the year?
a. 2,766,666 b. 2,783,333 c. 2,860,000 d. 2,877,333

Use the following information for the next four questions:

Kryslanz Co. is a wholesaler of guitar picks. The activity for product “Pick X” during August is shown
below:

Date Transaction Units Unit cost Total cost

1-Aug Inventory 2,000 ₱ 28.80 ₱ 57,600
7 Purchase 3,000 29.76 89,280
12 Sales 4,200
13 Purchase 4,800 30.40 145,920
14 Sales return 600
22 Sales 3,800
29 Purchase 1,900 30.88 58,672
30 Purchase return 300 30.88 (9,264)
Total goods available for sale ₱ 342,208
12. How much are the ending inventory and cost of goods sold under the FIFO – periodic cost flow
formula?
Ending inventory Cost of goods sold
a. 219,840 122,368
b. 112,341 229,867
c. 122,368 219,840
d. 122,386 219,804

13. How much are the ending inventory and cost of goods sold under the FIFO – perpetual cost flow
formula?
Ending inventory Cost of goods sold
a. 219,840 122,368
b. 112,341 229,867
c. 122,368 219,840
d. 122,386 219,804

14. How much are the ending inventory and cost of goods sold under the weighted average – periodic
cost flow formula?
Ending inventory Cost of goods sold
a. 229,840 112,160
b. 126,468 215,740
c. 120,080 222,128
d. 120,072 222,153

15. How much are the ending inventory and cost of goods sold under the weighted average –
perpetual cost flow formula?
Ending inventory Cost of goods sold
a. 121,794 220,414
b. 122,468 219,740
c. 122,017 220,191
d. 123,384 218,824

16. Vacation Co. buys and sells products A & B. The following unit costs are available for the
inventory as of December 31, 20x1: (All costs are borne by Vacation Co.)
A B
Number of units 2,000 3,000
Purchase cost per unit ₱125 ₱190
Delivery cost from supplier 10 30
Estimated selling price 150 250
Selling costs 22 28
General and administrative 15 18

How much total inventory shall be reported in Vacation Co.’s 20x1 financial statements?
a. 916,000 b. 930,000 c. 936,000 d. 696,000
17. On January 1, 20x1, Shock Co. signed a three year, noncancelable purchase contract that allows
Shock Co. to purchase up to 12,000 units of a microchip annually from Aha! Co. at ₱15 per unit.
The guaranteed minimum annual purchase is 3,000 units. At year-end, it was found out that the
goods are obsolete. Shock Co. had 4,000 units of this inventory at December 31, 20x1, and believes
these parts can be sold as scrap for ₱5 per unit. How much is the loss on purchase commitment to
be recognized on December 31, 20x1?
a. 70,000 b. 100,000 c. 60,000 d. 0

18. The raw materials inventory of Mug Co. on December 31, 20x1 have a cost of ₱20,000 and an
estimated net realizable value of ₱18,000. Information on the finished goods is as follows:
Cost……………………………………….₱250,000
NRV…………………….…………………₱280,000

How much is the total inventory on December 31, 20x1?

a. 268,000 b. 270,000 c. 298,000 d. 300,000

Use the following information for the next two questions:

Almost Co. has the following comparative information regarding its inventories.
20x2 20x1
Inventory, December 31 at cost 30,000 24,000
Inventory, December 31 at NRV 33,000 22,000
Cost of goods sold before adjustments 180,000 200,000

Almost Co. recognizes write-downs of inventories in cost of goods sold.

19. How much is the cost of goods sold in 20x1?

a. 200,000 b. 202,000 c. 198,000 d. 220,000

20. How much is the cost of goods sold in 20x2?

a. 178,000 b. 177,000 c. 182,000 d. 183,000
PART 2: INVENTORY ESTIMATION (10 PTS)

1. On October 1, 20x1, the warehouse of ABC Co. and all the inventories contained therein were
damaged by flood. Off-site back up of data base shows the following information:
Inventory, Jan. 1 10,000
Accounts payable, Jan. 1 3,000
Accounts payable, Sept. 30 2,000
Payments to suppliers 50,000
Freight-in 500
Purchase returns 500
Sales from Jan. to Sept. 80,000
Sales returns 5,000
Sales discounts 2,000
Gross profit rate based on sales 30%

Additional information:
Goods in transit as of October 1, 20x1, purchased FOB shipping point, amounted to ₱1,000, cost of
goods out on consignment is ₱1,200, and materials damaged by flood can be sold at a salvage value
of ₱1,800. How much is the inventory loss due to the flood?
a. 3,000 b. 2,500 c. 4,400 d. 4,900

2. On October 1, 20x1, the warehouse of ABC Co. and all the inventories contained therein were
razed by fire. Off-site back up of data base shows the following information:
Inventory, Jan. 1 20,000
Net purchases 190,000
Net sales from Jan. to Sept. 240,000
Gross profit rate based on cost 25%

Twenty percent of the inventory contained in the warehouse has been salvaged from the fire, while
half is partially damaged and can be sold as scrap at thirty percent of its cost. How much is the
inventory loss due to the fire?
a. 18,000 b. 5,400 c. 9,000 d. 11,700
3. The work in process inventories of ABC Manufacturing, Inc. were completely destroyed by fire
on June 1, 20x1. Amounts for the following accounts have been established.
January 1, 20x1 June 1, 20x1
Accounts payable 117,000 135,000
Raw materials 15,000 18,000
Work in process 60,000 ?
Finished goods 69,000 87,000

The following additional information was determined:

• Payments to suppliers for purchases on account, ₱60,000.
• Freight on purchases, ₱3,000.
• Purchase returns, ₱7,500.
• Direct labor, ₱48,000.
• Production overhead, ₱18,000.
• Sales from January 1 to May 31, ₱225,000.
• Sales returns, ₱45,000.
• Sales discounts, ₱15,000.
• Gross profit rate based on sales, 25%.

How much is the work in process destroyed by fire?

a. 48,000 b. 49,500 c. 58,500 d. 51,000
Use the following information for the next two questions:
Presented below is information pertaining to ABC Co.:
Cost Retail
Inventory, January 1 21,750 35,000
Purchases 138,250 200,750
Freight-In 5,000 -
Purchase discounts 1,250 -
Purchase returns 13,000 21,500
Departmental Transfers-In (Debit) 2,500 3,750
Departmental Transfers-Out (Credit) 2,000 3,000
Markups 15,000
Markup cancellations 5,000
Markdowns 30,000
Markdown cancellations 7,500
Abnormal spoilage (theft and casualty loss) 12,500 17,500
Sales 109,500
Sales returns 6,250
Sales discounts 2,500
Employee discounts 1,250
Normal spoilage (shrinkage and breakages) 500

4. How much is the ending inventory under the Average cost method?
a. 60,750 b. 60,000 c. 61,050 d. 62,400

5. How much is the ending inventory using the FIFO cost method?
a. 60,750 b. 60,000 c. 61,050 d. 62,400