Inventory- Practice Problem

PROBLEM 1 In annual audit on December 31, 013, the following transactions of Novelty Company are discovered. 1. Merchandise was received on January 8, 2014, and the related purchase invoice recorded on January 5, 2014. The invoice showed the shipment was made on December 29, 2013, FOB destination. 2. Merchandise was received on December 28, 2013, and the invoice was not recorded. It was located in the hands of the purchasing agent and was marked on consignment. 3. A packing case containing merchandise 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”. An investigation revealed that the customer’s order was dated December 18, 2013, but the case was shipped and the customer billed on January 10, 2014. 4. Merchandise received on January 6, 2014 was recorded as a purchase on January 7, 2014. The invoice showed shipment was made FOB supplier’s warehouse on December 31, 2013. Since it was not on hand on December 31, 2013, it was not included in inventory. 5. A special article, fabricated to order for a customer, was finished and in the shipping room on December 31, 2013. The customer was billed on that date and the article was excluded from inventory although it wasshipped on January 4, 2014. Required: State whether the merchandise should be included in the inventory on December 31, 2013 and state the reason for each item. Answer: 1. EXCLUDE – The term of the shipment is FOB destination. 2. EXCLUDE – The goods are held only for consignment. 3. INCLUDE – There is no perfected sale yet as of December 31, 2008. 4. INCLUDE – The term FOB supplier’s warehouse is synonymous with FOB shipping point. 5. EXCLUDE – There is already a constructive delivery since the article was specificallymade according to the customer’s specifications and the article is already completed on December 31, 2008. PROBLEM 2

Summer Company is a wholesaler of car seatcovers. At the beginning of the current year, the entity’s inventory consisted of 90 car seatcovers priced at P1,000 each. During the current year, the following events occurred: 1. 2. 3. 4. 5.

Purchased 800 car seatcovers on account at P1,000 each. Returned 50 defective car seatcovers to supplier and received credit. Paid of the car seatcovers purchased. Sold 790 car seatcovers at P2,000 each. Received 2 0car seat covers returned by a customer and gave redit. The goods were in excellent condition. 6. Received cash for 680 of the car seat covers sold. 7. Physical count at year-end revealed 60 units on hand. Required: a. Prepare journal entries, including adjustments to record the above transactions assuming the company uses periodic system and perpetual system. b. Determine the cost of sales under each inventory system. Requirement a Periodic System

Perpetual System

1. Purchases Accounts payable 800,000

800,000

2. Accounts payable Purchase returns 50,000

50,000

3. Accounts payable Cash 4. Accounts receivable Sales 1,580,000 5. Sales return Accounts receivable 790,000

800,000

50,000 600,000

1. Merchandise inventory 800,000 Accounts payable 2. Accounts payable 50,000 Merchandise inventory

600,000

3. Accounts payable Cash

1,580,000

4. Accounts receivable Sales

1,580,000

40,000 40,000

600,000 600,000 1,580,000

Cost of sales 790,000 Merchandise inventory

6. Cash 1,360,000 5. Sales return 40,000 Accounts receivable 1,360,000 Accounts receivable 40,000 7. Inventory-Dec. 31 Income summary 20,000 (60 x 1,000)

60,000 60,000

Merchandise inventory Cost of sales

20,000

6. Cash

1,360,000 Accounts receivable

7. Inventory shortage 10,000 Merchandise inventory

Shortage

Merchandise inventory per book Physical count 60,000 10,000

1,360,000 10,000 70,000

Requirement b Periodic System

Perpetual System

Inventory – January 90,000 Cost of sales recorded Purchases 800,000 (790,000 – 20,000) Purchase returns ( 50,000) 750,000 Inventory shortage Goods available for sale 840,000 Adjusted cost of sales 780,000 Less: Inventory – December 31 60,000 Cost of sales 780,000

770,000 10,000

PROBLEM 3 Daydream Company began operations on January 1 with 10,000 units of merchandise with unit cost of P80. Purchases for the year follow: Lot No.

Units

Unit Cost

1 200 2 8000 3 6000 4 9500 5 14500 The physical inventory reveals 15,000 units on hand

100 110 120 100 90 on December 31.

Required: Compute inventory cost on December 31 and cost of goods sold following each method listed below: 1. FIFO-periodic 2. Weighted average- periodic 3. Specific Identification (assuming the inventory comes form Lot 3 6,000 units and Lot 4, 9,000 units)

Units Total cost 1. FIFO - periodic Lot No. 4 50,000 5 1,305,000

Unit cost 500

100

14,500

90

15,000 2. Beginning inventory 800,000 Purchases: Lot No. 1 200,000 880,000 720,000 950,000

1,355,000 10,000

80

2,000

100

2

8,000

110

3

6,000

120

4

9,500

100

14,500

90

5 1,305,000 Goods available for sale

50,000

Weighted average (4,855,000/50,000)

15,000

4,855,000 97.10 1,456,500

3. Specific identification Lot 3 4

6,000 9,000 15,000

FIFO Weighted average Specific identification

Goods available 4,855,000 4,855,000 4,855,000

120 100

Inventory-Dec. 31 1,355,000 1,456,500 1,620,000

720,000 900,000 1,620,000 Cost of sales 3,500,000 3,398,500 3,235,000

PROBLEM 4 The following information pertains to an inventory item of Emcee Company for the month of December of the current year. Units 1-Dec 7 12 17 22

Beginnin g Purchase Sale Purchase Purchase

10000 30000 20000 60000 20000

Unit Cost

Unit selling price

52 50 90 45 43

28 Sale

70000

90

Required: Assuming the entity uses the periodic system, compute the December 31 inventory and cost of goods sold under: 1. FIFO 2. Weighted average

FIFO December 17 450,000 22

Average method December 1 520,000 7 17 22 Available for sale Inventory (5,580,000/120,000)

10,000 20,000 30,000

45 43

860,000 1,310,000

10,000

52

30,000 60,000

50 45 860,000 5,580,000

20,000 120,000 30,000

43

46.50 1,395,000 FIFO 5,580,000

Goods available for sale 5,580,000 Less: Inventory – December 31 Cost of goods sold

1,500,000 2,700,000

1,310,000 4,270,000

Average

1,395,000 4,185,000

PROBLEM 5 The records of Extreme Company showed the following: Units

Unit Cost

Total Cost

Beginnin 1-Jan g 31 Sale

10000 5000

40 400,000.00

1-Apr Purchase 31-Jul Sale 1-Oct Purchase

15000 18000 25000

50 750,000.00 60

1,500,000.

00 1-Dec Sale

12000

Required: Compute the cost of the ending inventory and cost of sales using: 1. FIFO- periodic 2. Weighted average 3. Moving average

Units Total cost

Unit cost

FIFO October 1

15,000

60

900,000

Weighted average – periodic January 1 April 1 October 1 Goods available for sale Less: Sales Ending inventory

10,000 15,000 25,000 50,000 35,000 15,000

40 50 60

400,000 750,000 1,500,000 2,650,000

Weighted average (2,650,000/50,000)

15,000

53

Units

795,000

Unit cost

Total

cost Moving average – perpetual January 1 31 Balance 200,000 April 1 Total 950,000 July 31 Balance 95,000 October 1 Total 1,595,000 December 31 Balance average

10,000 ( 5,000) 5,000

40 40

15,000 50 20,000 (18,000) 2,000 25,000 60__ 27,000

400,000 ( 200,000) 40 750,000 47.50 47.50 ( 855,000) 47.50

1,500,000 59.07

(12,000) 59.07 ( 708,840) 15,000 59.07 886,160 FIFO

Weighted

Inventory – January 1 Purchases Goods available for sale Less: Inventory – December 31 Cost of sales

400,000 2,250,000 2,650,000 900,000 1,750,000

Cost of sales – Weighted average perpetual January 31 Sale July 31 Sale December 31 Sale Total cost of sales

400,000 2,250,000 2,650,000 795,000 1,855,000 200,000 855,000 708,840 1,763,840

PROBLEM 6 The inventory records of Premiere Company showed the following data: Units Materials R S T Goods in process X Y Finished goods A B

Unit Cost

NRV

1000 2000 3000

110 250 300

100 260 330

4000 5000

500 650

480 620

2000 2000

800 730

790 780

Required: Determine the valuation of inventory following the measurement at LCNRV. Lower of Units value Materials: R S

1,000 2,000

cost or NRV 100 250

Inventory 100,000 500,000

T

3,000

300

900,000

Goods in process: X Y

4,000 5,000

480 620

1,920,000 3,100,000

Finished goods: A B

2,000 2,000

790 730

1,580,000 1,460,000

Valuation at lower of cost or NRV

9,560,000

PROBLEM 7 The inventory of HH Company at the end of the current year is to be recorded at the lower of cost or net realizable value. Ending inventory data per unit are summarized below: Item A B C D E

Units Cost Estimated sales price 1000 120 180 1500 110 140 1200 150 170 1800 140 190 1700 130 200

Cost of sell 30 20 30 30 40

Required: Determine the inventory value applying the lower of cost or net realizable value. (Lower of cost or NRV) Units Unit cost value A B C D E

1,000 1,500 1,200 1,800 1,700

120 110 150 140 130

NRV 150 120 140 160 160

Inventory 120,000 165,000 168,000 252,000 221,000 926,000

PROBLEM 8 Landmark Company purchased a tract of unimproved land for P26,850,000. The land was improved and subdivide into residential lots at a cost of P43,500,000. These lots were all of the same size but owing to differences in location were offered for sale at different prices as follows:

Number of lots

Group

Sales price per lot

1

20 3,000,000.00

2

40 2,500,000.00

3

100 2,000,000.00

Group 1 2 3

5 4 3

Required: Compute the cost of unsold lots at the end of the year.

Purchase price Improving and subdividing cost Total cost

26,850,000 43,500,000 70,350,000

Sales price Group 1 (20 x 3,000,000) 40,200,000 2 (10 x 2,500,000) 16,750,000 3 (10 x 2,000,000) 13,400,000

Group 1 (40,200,000/20) 10,050,000 2 (16,750,000/10) 6,700,000 3 (13,400,000/10)

Fraction

Cost

60,000,000

60/105

25,000,000

25/105

20,000,000

20/105

105,000,000

Cost per lot

70,350,000

Unsold

Cost

2,010,000

5

1,675,000

4

1,340,000

3 4,020,000 20,770,000