Page |1

Chapter 7
Inventories
PROBLEM 1: TRUE OR FALSE
1. TRUE – i.e., finished goods, work in process, and raw
materials & supplies
2. FALSE
3. FALSE – consignor
4. FALSE – e.g., increase in inventory resulting from
cash purchases
5. TRUE
6. FALSE (₱3 + ₱4 = ₱7)
7. FALSE (₱2 – the cost of the red apple)
8. FALSE (2 + 3 + 4) / 3 apples x 2 apples on hand = ₱6
9. TRUE
10. TRUE

PROBLEM 2: MULTIPLE CHOICE – THEORY

1. D - Assets used in producing goods (e.g., factory
equipment) or in rendering services (e.g., dental
chair) are classified as PPE.

2. D
3. B
4. A
5. C – memo entry
6. A
7. C
8. A
9. D
10. D
11. D
12. D
13. A
14. A
15. C
16. A
17. A
18. C
19. C
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20. D

PROBLEM 3: EXERCISES
1. Solutions:
Requirement (a): FOB shipping point, Freight
collect
Dec. Purchases 100,00
31, Accounts payable 0 100,00
20x1 0
Jan. 2, Freight-in 10,000
20x2 Cash 10,000
Jan. 5, Accounts payable 100,00
20x2 Cash 0 100,00
0

Requirement (b): FOB destination, Freight prepaid

Dec. 31, No entry -
20x1 -
Jan. 2, Purchases 100,0
20x2 Accounts payable 00 100,0
00
Jan. 5, Accounts payable 100,0
20x2 Cash 00 100,0
00

Requirement (c): FOB shipping point, freight

prepaid
Dec. 31, Purchases 100,0
20x1 Freight-in 00
Accounts payable 10,00 110,0
0 00
Jan. 2, No entry -
20x2 -
Jan. 5, Accounts payable 110,0
20x2 Cash 00 110,0
00

Requirement (d): FOB destination, Freight collect

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Dec. 31, No entry -

20x1 -
Jan. 2, Purchases 100,0
20x2 Accounts payable 00 90,00
Cash 0
10,00
0
Jan. 5, Accounts payable 90,00
20x2 Cash 0 90,00
0

2. Solution:
Perpetual system Periodic system
(a)
Inventory 54,000 Purchases 50,000
Accounts payable Freight-in 4,000
50,000 Accounts payable
Cash 50,000
4,000 Cash
4,000
(b)
Accounts payable 5,000 Accounts payable 5,000
Inventory Purchase returns
5,000 5,000

(c)
Accounts receivable Accounts receivable
90,000 90,000
Sales Sales
90,000 90,000

Cost of goods sold No entry

30,000
Inventory
30,000

(d)
Sales returns 6,000 Sales returns 6,000
Accounts receivable Accounts receivable
6,000 6,000
 Page |4

Inventory 2,000 No entry

Cost of goods sold
2,000

3. Solution:
Effect of error on:
Nature of error Gross
profit COGS
a. Overstatement of beginning
Under
inventory Over
b. Understatement of purchases Over Under
c. Overstatement of purchase
Over
returns Under
d. Understatement of purchase
Under
returns Over
e. Overstatement of ending
Over
inventory Under
f. Understatement of ending
Under
inventory Over

4. Solution:

Gross method Net method

Purchase of inventory
Purchases 90,000 Purchases 88,200
Accounts payable Accounts payable
90,000 88,200

(i) Payment is made within discount period

Accounts payable Accounts payable 88,200
90,000 Cash
Purchase discounts 88,200
1,800
Cash
88,200

(ii) Payment is made beyond discount period.

Accounts payable Accounts payable
90,000 88,200
Cash Purchase discount lost
 Page |5

90,000 1,800
Cash
90,000

5. Solution:
Inventory, Net Cost of Inventory,
beg. purchases sales end.
a
. 10,000 198,000 112,000 96,000
b
. 36,000 145,000 125,000 56,000
c
. 15,000 58,000 64,000 9,000
d
. 25,200 112,000 89,200 48,000

PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL

1. B
Solution:
Unadjusted 260,
balance 000
11,
(a) 000
5,
(b) 000
(16,
(c) 000)
20,
(d) 000
(4,
(e) 000)
Correct 276,
inventory 000

2. C – the amount based on the physical count. No

adjustment is necessary:
 The goods are properly included in inventory because
they were shipped only on July 10, 2002, after the
June 30, 2002 cut-off date.
 The goods purchased FOB destination are properly
 Page |6

excluded.

3. D
Solution:
Wareho Consigned
Total
use goods
Beginning inventory 110,000 12,000
Purchases 480,000 60,000
Freight in 10,000
Transpo. to
5,000
consignees
TGAS 600,000 77,000
Ending inventory (145,000) (20,000)
512,0
Cost of goods sold 455,000 57,000
00

4. D
Mark-up on unsold consigned goods (40K x
40%) 16,000

Goods held on consignment by Opal 27,000

Total reduction in inventory 43,000

5. C Net method [(80K + 100K) x 98%] = 176,000

Gross method (80K x 98%) + 100K = 178,400

6. C
 Inventory (380,000 x 98% = 372,400);
 Accounts payable: 372,400 initial measurement +
7,600 adjustment on Dec. 31, 20x1 = 380,000

Initial recognition on Dec. 15, 20x1:

Purchases (380,000 x 98%) 372,400
Accounts payable
372,400

Adjusting entry on Dec. 31, 20x1:

Purchase discount lost (380,000 x 2%) 7,600
Accounts payable
7,600
 Page |7

7. A
Solution:
EI: 200,000 x 98% x 10% = 19,600
COGS: 200,000 x 98% x 90% = 176,400

8. C
Solution:
I. Discount is allocated only to the goods sold:
Gross Allocation of Net
amts. discount amounts
EI (200K x
10%) 20,000 - 20,000
COGS (200K x 176,80
90%) 180,000 3,200 0
Total 200,000 3,200

II. Discount is allocated to both EI and COGS:

Gross Allocation of Net
amts. discount amounts
EI (200K x
10%) 20,000 320* 19,680
COGS (200K x 177,12
90%) 180,000 2,880* 0
Total 200,000 3,200

* (3,200 x 10%); (3,200 x 90%)

9. D
Solutions:
FIFO periodic
 Ending inventory, in units = 1,400 – 400 + 800 – 900
+ 700 – 600 = 1,000 units

In Unit In
units cost pesos
Ending inventory 1,000
Allocation to June 24
purchase (700) 30 21,000
Excess allocated to June 300 35 10,500
 Page |8

14
purchase
Ending inventory, in 31,50
pesos 0

 TGAS, in pesos:
Transactio Unit In
Date n Quantity Cost pesos
Balance 1,
June 1
fwd. 400 24 33,600
Purchase
14 800 35 28,000
Purchase
24 700 30 21,000
TGAS, in pesos
82,600

82,
TGAS in pesos 600
(31,
Ending inventory, in pesos 500)
51
Cost of goods sold ,100

FIFO perpetual
 SAME AS FIFO PERIODIC

or

Transact Unit In
Date ion Quantity Cost pesos
June 1 Balance 1,400 24 33,600
8 Sale 400 24 (9,600)
14 Purchase 800 35 28,000
 Page |9

(21,60
18 Sale 900
24 0)
24 Purchase 700 30 21,000
29 Sale 600
100 from June 1 24 (2,400)
(17,50
500 from June 14 35 0)
31,50
Ending inventory 0
Cost of goods sold (9,600 + 21,600 + 2,400 + 51,10
17,500) 0

10. A
Solutions:
Weighted average periodic

Weighted Ave. Unit cost = TGAS, in pesos ÷ TGAS, in

units

 TGAS, in units = 1,400 + 800 + 700 = 2,900 units

Weighted Ave. Unit cost = ₱82,600 (see previous

solution) ÷ 2,900
Weighted Ave. Unit cost = ₱28.48

Ending inventory = ₱28.48 x 1,000 units = 28,480

82,
TGAS in pesos 600
(28,
Ending inventory, in pesos 480)
54
Cost of goods sold ,120

Weighted average perpetual

Quanti Unit In
Date Transaction ty Cost pesos
June Balance
1,400
1 forwarded 24 33,600
Sale (400)
8 (9,600)
 P a g e | 10

Purchase 800
14 35 28,000
Totals 1,800 28.89 52,000
Sale (900)
18 (26,001)
Purchase 700
24 30 21,000
Totals 1,600 29.37 46,999
Sale (600)
29 (17,622)
Ending
inventory 1,000 29,377
Cost of goods sold (9,600 + 26,001
+ 17,622) 53,223

11. C
Solution:
FIFO – periodic
2,0
Beginning inventory in units
00
Net purchases in units (3,000 + 4,800 + 9,4
1,900 – 300) 00
11,40
Total goods available for sale in units
0

11,4
Total goods available for sale in units
00
Quantity of goods sold (4,200 – 600 + (7,4
3,800) 00)
4,0
Ending inventory in units
00

Unit Unit Total

s cost cost
Ending inventory to be
4,000
allocated
Allocated as follows:
From Nov. 29 net purchases
(1,60 ₱38.6 ₱
(1,900 - 300)
0) 0 61,760
Bal. to be allocated to the next 2,400
 P a g e | 11

most recent purchase date

(2,40 38.0 91,20
From Nov. 21 purchase
0) 0 0
₱152,9
Ending inventory at cost -
60

Total goods available for sale in pesos (see

below) 427,760
(152,960
Ending inventory at cost
)
274,80
Cost of goods sold
0

 TGAS in pesos:
Unit Total
Date Transaction Units
cost cost
2,0 ₱ ₱
1-Aug Inventory
00 36.00 72,000
3,0 37.
7 Purchase
00 20 111,600
4,8 38.
21 Purchase
00 00 182,400
1,9 38.
29 Purchase
00 60 73,340
Purchase 3 38.
30
return 00 60 (11,580)
Total goods available ₱
for sale 427,760

FIFO – perpetual
 SAME AS FIFO PERIODIC

12. A
Solution:
Weighted Average - Periodic
(a)
Weighted average unit cost = (₱427,760 ÷ 11,400 (a)) =
₱37.52
(a)
see previous computations

Ending inventory in units (refer to previous

computation) 4,000
Multiply by: Weighted average unit cost
 P a g e | 12

37.52
Ending inventory at cost
150,080

Total goods available for sale in pesos (refer to 427,76

previous table) 0
Ending inventory at cost (150,080)
277,6
Cost of goods sold
80

Weighted Average – Perpetual

Unit Total
Date Transaction Unit cost
s cost
1-Nov Inventory 2,000 ₱36.00 ₱72,000
7 Purchase 3,000 37.20 111,600
Moving average unit cost =
5,000 36.72 183,600
(₱183,600 ÷ 5,000)
(4,20 (154,224
12 Sales 36.72
0) )
15 Purchase 4,800 38.00 182,400
Moving average unit cost =
5,600 37.82 211,776
(₱211,776 ÷ 5,600)
16 Sales returns 600 36.72 22,032
Moving average unit cost =
6,200 37.71 233,808
(₱233,808 ÷ 6,200)
(3,80 (143,
22 Sales 37.71
0) 298)
29 Purchase 1,900 38.60 73,340
30 Purchase returns (300) 38.60 (11,580)
Ending inventory in units ₱
& at cost 4,000 152,270

Cost of goods sold (Nov. 12, ₱154,224 – ₱22,032 Sales

returns + Nov. 22, ₱143,298 = ₱275,490)

13. C
Solution:
 P a g e | 13

 Concept: TGAS is the same under LIFO and FIFO.

TGAS in pesos (195,000 24

LIFO COGS + 65,000 0,0
LIFO) 00
(65
FIFO Ending inventory in
,00
pesos
0)
17
FIFO Cost of goods sold 5,0
00

14. A
Solution:
Invoice price inclusive of VAT
112,000

VAT (12,000)
Shipping costs
40,000

Transit insurance 12,000

Commission to broker
5,600
Cost of inventory
157,600

15. C
Solution:
1,000,
Sales 000
(50,
Sales discounts 000)
(10,
Sales returns 000)
940,
Net sales
000
Cost of goods sold:
Beginning 60,
inventory 000
500,
Purchases
000
 P a g e | 14

(25,
Purchase returns
000)
Purchase (10,
discounts 000)
60,
Freight-in 000
585,
TGAS 000
(75, (510,
Ending inventory 000) 000)
43
Gross profit
0,000

The freight-out and commission expense are presented as

other operating expenses; thus, they do not affect the
computation of gross profit.

16. C
Solution:
X Y Z Total
Cost (50 + 5); (30 + 4);
(109 + 68) 55 34 177
NRV (56 - 4); (60 - 8);
52 52 175
(250 - 75)
Lower 52 34 175
No. of units 3,700 2,500 1,300
192,4 85,00 227,5 504,9
Total
00 0 00 00

17. D – Raw materials are not written-down if the finished

goods in which they will be incorporated are expected
to be sold at or above cost.

18. B – The recovery in 20x2 of ₱40,000 (490,000 – 450,000)

exceeds the previous write-down. Thus, the amount
of reversal recognized is limited to the previous write
down of ₱30,000 (410,000 – 440,000).

19. B
Solution:
 P a g e | 15

Inventory
beg. 60,000
Net purchases,
excldg.
freight in 465,000
Freight-in
(squeeze) 60,000
510,000 COGS
75,000 end.

OR

Inventory
beg. 60,000
Purchase
Purchases 500,000 25,000 returns
Freight-in Purchase
(squeeze) 60,000 10,000 discounts
510,000 COGS
75,000 end.

TGAS = 510,000 COGS + 75,000 EI = 585,000;

OR

TGAS = 60,000 BI + (500,000 – 25,000 – 10,000 +

60,000) Net purchases = 585,000

20. A
Solution:
Inventory
60,00
beg. 0
500,0 25,0 Purchase returns
Purchases 00 00 (squeeze)
60,00 10,00
Freight-in 0 0 Purchase discounts
 P a g e | 16

510,0
00 COGS
75,0 end. (585K TGAS – 510K
00 COGS)

PROBLEM 5: CLASSROOM ACTIVITIES

ACTIVITY 1:
Solutions:
(a) The sale terms are FOB SHIPPING POINT and
Freight COLLECT. (see ‘COD’ Cash On Delivery on Bill
of Lading)

(b) Journal entry:

(i) Perpetual inventory system:

JOURNAL
Re
DATE ACCOUNTS f. Debit Credit
9/27/ 8,689.29(
X1(a) Inventory b)

Input VAT 910.71

Accounts 8,500.0
payable 0
1,100.0
Cash 0
to record the purchase of inventory

(a)
The date of the Bill of Lading, i.e., the date Wictory Liner
receives the goods from XYZ, Inc.
(b)
Purchase price net of VAT ₱7,589.29 + Freight (₱900.00
bill of lading + ₱200.00 porter fee) = ₱8,689.29 cost of
purchase

(ii) Periodic inventory system:

JOURNAL
DATE ACCOUNTS Re Debit Credit
 P a g e | 17

f.
7,589.29
9/27/X1 Purchases (c)

1,100.00
Freight-in (d)

Input VAT 910.71

Accounts 8,500.0
payable 0
1,100.0
Cash 0
to record the purchase of inventory

(c)
Purchase price net of VAT
(d)
₱900.00 bill of lading + ₱200.00 porter fee = ₱1,100

ACTIVITY 2:
Solutions:
1. Specific Identification:
a. Ending inventory ₱11.75
b. Cost of goods sold ₱7.00 – the cost of item
“broken”

2. FIFO:
a. Ending inventory ₱13.00
b. Cost of goods sold ₱5.75 – the cost of item
“happy”

3. Weighted Average Cost:

a. Ending inventory (₱5.75 + ₱6.00 + ₱7.00) - ₱6.25
= ₱12.50
b. Cost of goods sold (₱5.75 + ₱6.00 + ₱7.00) ÷ 3 =
₱6.25
 P a g e | 18

PROBLEM 6: FOR CLASSROOM DISCUSSION

1. Solution:
Cost of Net cash
inventory on payment on
Scenarios: Dec. 31 Jan. 5
a. FOB Destination,
Freight prepaid None 100,000
b. FOB Shipping
point, Freight
collect 100,000* 100,000
c. FOB Destination,
Freight collect None 94,000
d. FOB Shipping
point, Freight
prepaid 106,000 106,000

* The ₱6,000 freight-in is recorded on Jan. 2, 20x2 when

Entity A accepts delivery from the carrier. On Jan. 2,
20x2, the total cost of the inventory would be increased
to ₱106,000.
If, however, Entity A receives notice of the
shipment cost from the carrier beforehand, the freight-in
would have been recorded on December 30, 20x1
(shipment date). Accordingly, the cost of inventory on
December 31, 20x1 would be ₱106,000.
Entity A may also want to estimate the freight cost
and records it on Dec. 30, 20x1 or Dec. 31, 20x1. This,
however, is seldom done in practice.

2. Solution:
180,00
Unadjusted balance 0
(30,00
(a) Goods received on consignment 0)
(d) Unsold goods sent out on consignment 9,000
(18,000 x 1/2)
(e) Freight on unsold goods out on consignment 1,000
(2,000 x 1/2)
160,0
Adjusted balance 00
 P a g e | 19

3. Solution:
Accounts
Inventory
payable
Unadjusted balances 500,000 120,000
(a) 60,000 -
(b) (80,000) (80,000)
(c) 50,000 50,000
(d) 30,000 -
Adjusted balances 560,000 90,000

4. Solution:
100,00
a. Inventory on display shelves
0
250,00
b. Inventory stocked in warehouse
0
c. Inventory sold under a bill and hold (20,00
arrangement 0)
d. Inventory purchased on installment basis 30,000
e. Inventory pledged as collateral security for a
bank loan 60,000
g. Inventory sold with repurchase agreement 10,000
430,00
0

5. Solutions:
Requirement (a):
Perpetual system Periodic system
(a)
Inventory 450,000 Purchases 450,000
Accounts payable Accounts payable
450,000 450,000

(b)
Inventory 25,000 Freight-in 25,000
Cash Cash
25,000 25,000
 P a g e | 20

(c)
Accounts payable 10,000 Accounts payable 10,000
Inventory Purchase returns
10,000 10,000

(d)
Accounts receivable Accounts receivable
800,000 800,000
Sales Sales
800,000 800,000

Cost of goods sold No entry

380,000
Inventory
380,000

(e)
Sales returns 9,000 Sales returns 9,000
Accounts receivable Accounts receivable
9,000 9,000

Inventory 4,275 No entry

Cost of goods sold
4,275

Requirement (b):

Perpetual system

Sales 800,000

Sales returns (9,000)

Net sales 791,000

Cost of sales (380,000 –
4,275) (375,725)

Gross profit 415,275

Periodic system
 P a g e | 21

Sales 800,000

Sales returns (9,000)

Net sales 791,000

Cost of sales:

Beginning inventory 20,000

Net purchases (450K + 25K
– 10K) 465,000

Total goods avail. for sale 485,000

Ending inventory (109,275) (375,725)

Gross profit 415,275

6. Solution:
100,00
Purchase price, gross of trade discount
0
(20,000
Trade discount
)
Non-refundable purchase tax 5,000
Freight-in (Transportation costs) 15,000
Commission to broker 2,000
102,0
Total cost of inventories 00

The advertisement costs are selling costs. These

are expensed in the period in which they are incurred.

7. Solution:
Gross method Net method
Jan. 1, 20x1
Purchases Purchases 136,800*
144,000* Accounts payable
Accounts payable 136,800
144,000
*(₱200,000 x 80% x 90% x
 P a g e | 22

*(₱200,000 x 80% x 90%) 95%)

Jan. 10, 20x1

Accounts payable* 72,000 Accounts payable* 68,400
Purchase discounts Cash
3,600 68,400
(144,000 x ½ x 5%)
Cash**
68,400
* (136.8K x ½)
*(144K x ½)
**(144K x ½ x 95%)

Jan. 31, 20x1

Accounts payable* 72,000 Accounts payable
Cash 68,400
72,000 Purchase discount lost
3,600
*(144K x ½) Cash
72,000

8. Solution:
Requirement (a): FIFO Periodic
Ending inventory, in units = (3,000 + 2,250 + 10,200 –
2,700 – 7,200) = 5,550

Unit Total
Units cost cost
Ending inventory in
units 5,550
Allocation to latest
purchases:
Jan. 26 2,250 20.60 46,350
Jan. 6 (balance) 3,300 21.50 70,950
Ending inventory in
pesos 117,300

TGAS (58,650 + 219,300 + 46,350) 324,300

 P a g e | 23

(117,300
Less: Ending inventory in pesos )
COGS 207,000

Requirement (b): FIFO Perpetual

Answers are the same with FIFO Periodic.

OR
Unit
Units Total Cost
Cost
Balance at January 1, 58,
3,000 19.55
2002 650
219,
January 6, 2002 10,200 21.5
300
(52,
January 7, 2002 (2,700) 19.55
785)
46,
January 26, 2002 2,250 20.6
350
(154,
January 31, 2002 (7,200) *
215)*
Ending 117,
inventory 5,550 300

*The COGS on the Jan. 31 sale is computed as follows:

Total
Units Unit Cost
Cost
Jan. 31 sale 7,200
Allocation:
From Jan. 1 (3,000 -
2,700) 300 19.55 5,865
From Jan. 6
(balance) 6,900 22 148,350

COGS - Jan. 31 sale 154,215

COGS = (52,785 + 154,215) amounts taken from table above =

207,000

Requirement (c): Weighted Average Cost Periodic

Weighted ave. TGAS in pesos
=
unit cost TGAS in units
(58,650 + 219,300 + 46,350) =
Weighted ave. 324,300
=
unit cost (3,000 + 10,200 + 2,250) =
15,450
 P a g e | 24

Weighted ave.
= 20.99
unit cost

Ending inventory in units 5,550

Multiply by: Wtd. Ave. Cost 20.99
116,494.
Ending inventory in pesos 50

TGAS in pesos 324,300

(116,494.
Less: Ending inventory in pesos
50)
207,805.
COGS
50

Requirement (d): Weighted Average Cost Perpetual

Unit
Units Total Cost
Cost
Balance at January 1,
3,000 19.55 58,650
2002
January 6, 2002 10,200 21.5 219,300
TGAS 13,200 21.06 277,950
January 7, 2002 (2,700) 21.06 (56,862)
January 26, 2002 2,250 20.6 46,350
TGAS 12,750 20.98 267,438
January 31, 2002 (7,200) 20.98 (151,056)
Ending inventory 5,550 116,382

COGS = (56,862 + 151,056) = 207,918

9. Solutions:
Requirement (a):
Product Product Product
Total
A B C
Purchase
100,000 250,000 300,000
price
Freight-in 12,000 30,000 36,000
 P a g e | 25

Cost 112,000 280,000 336,000

Selling price 210,000 300,000 570,000

Freight-out (10,500) (75,000) (11,400)
NRV 199,500 225,000 558,600

673,00
Lower 112,000 225,000 336,000 0

Requirement (b):
Product B: (280,000 – 225,000) = 55,000

10. Solution: 200,000 – the amount of write-down in 20x1

because the 20x2 recovery exceeds the cumulative
amount of write-downs recognized in the previous
periods (i.e., 250K recovery vs. 200K previous write-
down).