CHAPTER 26

INVENTORY
Basic problems

Problem 26-1 (IAA)

Aman Company provided the following data:

Items counted in the bodega 4,000,000

Items included in the count specially segregated
per sale contract 100,000
Items in receiving department, returned by customer,
in good condition 50,000
Items ordered and in the receiving department 400,000
Items ordered, Invoice received but goods not
received. Freight is on account of seller. 300,000
Items shipped today, invoice mailed, FOB shipping point. 250,000
Items shipped today, invoice mailed, FOB destination. 150,000
Items currently being used for window display 200,000
Items on counter for sale 800,000
Items in receiving department, refused because of damage 180,000
Items included in count, damaged and unstable 50,000
Items in the shipping department 250,000

What is the correct amount of inventory?

a. 5,700,000
b. 6,000,000
c. 5,800,000
d. 5,150,000

Solutions 26-1 Answer a

Items counted in the bodega 4,000,000

Items included in count specifically segregated ( 100,000)
Items returned by customer 50,000
Items ordered and in receiving department 400,000
Items shipped today, FOB destination 150,000
Items for display 200,000
Items on counter for sale 800,000
Damaged and unstable items included in count ( 50,000)
Items in the shipping department 250,000

5,700,000

Problem 26-2(IAA)
Lunar Company included the following items in inventory:

Materials 1,400,000
Advance for materials ordered 200,000
Good in process 650,000
Unexpired insurance on inventory 60,000
Advertising catalogs and shipping cartons 150,000
Finished goods in factory 2,000,000
Finished goods in entity- owned retail store,
Including 50% profit on cost 750,000
Finished goods in hands of consignees including
40% profit on sales 400,000
Finished goods in transit to customers, shipped FOB
Destination at cost 250,000
Finished goods out on approval , at cost 100,000
Unsalable finished goods, at cost 50,000
Office supplies 40,000
Materials in transit, shipped FOB shipping point,
Excluding freight of P30,000 330,000
Goods held on consignment, at sales price, cost P150,000 200,000

What is the correct amount of inventory?

a. 5,375,000
b. 5,500,000
c. 5,540,000
d. 5,250,000

Solution 26- 2 Answer b

Materials 1,400,000
Goods in process 650,000
Finished goods in factory 2,000,000
Finished goods in entity- owned retail store(750,000/150%) 500,000
Finished goods in the hands of consignees(400,000/60%) 240,000
Finished goods in transit 250,000
Finished goods out on approval 100,000
Materials in transit(330,000+30,000) 360,000
Correct inventory 5,500,000

Problem 26-3(IAA)

Ram Company provided the following information at the end of current year.
Finished goods in storeroom, at cost, including overhead
Of P400,000 or 20% 2,000,000
Finished goods in transit, including freight charge of
P20,000, FOB shipping point.
250,000
Finished goods held by salesmen, at selling price,
Cost, P100,000
140,000
Goods in process, at cost of materials and direct labor 720,000
Materials
1,000,000
Materials in transit, FOB destination
50,000
Defective materials returned to suppliers
100,000
Shipping supplies
20,000
Gasoline and oil for testing finished goods
110,000
Machine lubricants
60,000

What is the correct amount of inventory?

a. 4,000,000
b. 4,170,000
c. 4,270,000
d. 4,090,000

Solution 26-3 Answer b

Finished goods
2,000,000
Finished goods held by salesmen at cost
100,000
Goods in process
900,000
Materials
1,000,000
Factory supplies:
Gasoline and oil for testing finished goods
110,000
Machine lubricants
60,000
Correct inventory
4,170,000

Goods in process, including overhead

100%
Overhead
20%

Goods in process, excluding overhead

80%

Total cost of goods in process( 720,000/80%)

900.000
Problem 26-4(IFRS)

Brilliant Company has incurred the following costs during the current year:

Cost of purchases based on vendors’ invoices 5,000,000

Trade discount on purchases already deducted
From vendors’ invoices 500,000
Import duties 400,000
Freight and insurance on purchases 1,000,000
Other handling costs relating to imports 100,000
Salaries of accounting department 600,000
Brokerage commission paid to agents for arranging imports 200,000
Sales commission paid to sales agents 300,000
After – sales warranty costs 250,000

What is the total cost of purchases?

a. 5,700,000
b. 6,100,000
c. 6,700,000
d. 6,500,000

Solution 26-4 Answer c

Cost of purchases 5,000,000

Import duties 400,000
Freight and insurance 1,000,000
Other handling costs 100,000
Brokerage commission 200,000

Total cost of purchases 6,700,000

The salaries of accounting department, sales commission and after – sales warranty costs are not inventoriable
but should be
Expensed immediately.
Problem 26-5 (IFRS)

Corolla Company incurred the following costs:

Materials 700,000
Storage costs of finished goods 180,000
Delivery to customers 40,000
Irrecoverable purchase taxes 60,000

At what amount should the inventory be measured?

a. 880,000
b. 760,000
c. 980,000
d. 940,000

Solutions 26-5 Answer b

Materials 700,000
Irrecoverable purchases taxes 60,000

Total cost of inventory 760,000

Problem 26-6(IFRS)

Eagle Company incurred the following costs in relation to a certain product:

Direct materials and labor 180,000

Variable production overhead 25,000
Factory administrative costs 15,000
Fixed production costs 20,000

What is the correct measurement of the product?

a. 205,000
b. 225,000
c. 195,000
d. 240,000

Solution 26-6 Answer b

All costs are inventoriable

Problem 26-7 ( AICPA ADAPTED)

Fenn Company provided the following information for the current year:

Merchandise purchased for resale 4,000,000

Freight in ‘ 100,000
Freight out 50,000
Purchase returns 20,000
Interest on inventory loan 200,000

What is the inventoriable cost of the purchase?

a. 4,280,000
b. 4,030,000
c. 4,080,000
d. 4,130,000

Solution 26-7 Answer c

Merchandise purchased 4,000,000

Freight in 100,000
Purchase returns ( 20,000)

Inventoriable cost 4,080,000

Problem 26-8( AICPA ADAPTED)

On December 28,2017, kerr Company purchased goods costing P500,000 FOB destination. These goods were
received on December 31,2017. The costs incurred in connection with the sale and delivery of the goods were;

Packaging for shipment 10,000

Shipping 15,000
Special handling charges 25,000

On December 31,2017 , what total cost should be included in inventory?

a. 545,000
b. 535,000
c. 520,000
d. 500,000

Solution 26-8 Answer d

When goods are purchased FOB destination, the seller is responsible for costs incurred in transporting the goods
to the buyer.
Problem 26-9( AICPA ADAPTED)

Stone Company had the following transactions during December:

Inventory shipped on consignment to Beta Company 1,800,000

Freight paid by stone 90,000
Inventory received on consignment from Alpha Company 1,200,000
Freight paid by Alpha 50,000

No sales of consignment goods were made in December.

What amount should be included in inventory on December 31?

a. 1,200,000
b. 1,250,000
c. 1,800,000
d. 1,890,000

Solution 26-9 Answer d

Inventory shipped on consignment to Beta 1,800,000

Freight paid by stone 90,000

Total cost of consigned inventory 1,890,000

Problem 26-10( AICPA ADAPTED)

On October 1,2017, Grimm Company consigned 40 freezers to Holden Company costing P14,000 each for sale
at P20,000 each and paid P16,000 in transportation costs.

On December 30,2017, Holden Company reported the sale of 10 freezers and remitted P170,000. The remittance
was net of the agreed 15% commission.

What amount should be recorded as consignment sales revenue for 2017?

a. 154,000
b. 170,000
c. 196,000
d. 200,000

Solution 26-10 Answer d

Freezers sold( 10 x P20,000) 200,000

Problem 26- 11(AICPA ADAPTED)

On December 1, 2017, Alt Department Store received 505 sweaters on consignment from Todd. Todd’s cost for
the sweaters was P800 each, and they were priced to sell at P1,000.

Alt’s commission on consigned goods 10%. On December 31,2017, 5 sweaters remained.

On December 31,2017, what amount should be reported as payable for consigned goods?

a. 490.000
b. 454,000
c. 450,000
d. 404,000

Solutions 26-11 Answer c

Payable for consigned goods( 500,000 – 50,000) 450,000

Problem26-12 ( AICPA ADAPTED)

Clem Company provided the following for the current year:

Central warehouse Held by

consignees

Beginning inventory 1,100,000

120,000
Purchases 4,800,000 600,000
Freight in 100,000
Transportation to consignees 50,000
Freight out 300,000 80,000
Ending inventory 1,450,000 200,000

What is the cost of goods sold for the current year?

a. 4,550,000
b. 4,850,000
c. 5,070,000
d. 5,120,000

Solution 26-12 Answer d

Beginning inventory 1,220,000

Purchases 5,400,000
Freight in ( 100,000 + 50,000) 150,000

Goods available for sale 6,770,000

Ending inventory( 1,450,000 + 200,000) ( 1,650,000)

Cost of goods sold 5,120,000

Problem 26-13( AICPA ADAPTED)

Brunette Company shipped inventory on consignment to Heart Company with original cost P500,000. Heart
paid P12,000 for advertising that was reimbursable from Brunette.

At the end of the year, 40% of the inventory was sold for P320, 000. The agreement stated that a commission of
10% will be provided to Heart for all sales.

What amount should be reported as net income from the consignment?

a. 100,000
b. 120,000
c. 76,000
d. 0

Solution 26-13 Answer c

Consignment sales 320,000

Cost of goods sold( 40% x 500,000) ( 200,000)
Advertising ( 12,000)
Commission (10% x 320,000) ( 32,000)

Net income from consignment 76,000

Problem 26-14( AICPA ADAPTED)

Seafood Company commenced operations during the year as large importer and exporter of seafood. The
imports were all from one country overseas. The entity reported the following data:

Purchases during the year 12,000,000

Shipping costs from overseas 1,500,000
Shipping costs to export customers 1,000,000
Inventory at year- end 3,000,000

What amount of shipping costs should be included in the year- end inventory valuation?

a. 250,000
b. 625,000
c. 375,000
d. 0

Solution 26-14 Answer c

Percent of inventory at year-end

(3,000,000 / 12,000,000 purchases) 25%

Inventory shipping costs from overseas

( 25% x 1,500,000) 375,000
Problem 26-15( AICPA ADAPTED)

Venice Company included the following in inventory at year – end:

Merchandise out on consignment at sale price,

Including 40% markup on sales 1,400,000
Goods purchased in transit, shipped FOB shipping point 1, 200,000
Goods held on consignment by Venice 900,000

At what amount should the inventory be reduced?

a. 1,460,000
b. 3,500,000
c. 2,300,000
d. 1,740,000

Solution 26-15 Answer a

Markup on goods out on consignment( 1,400,000 x 40% ) 560,000

Goods held on consignment 900,000

Total reduction 1,460,000

Problem 26- 16 ( AICPA ADAPTED)

Dean Sportswear regularly buys sweaters from Mill Company and is allowed trade discounts of 20% and 10%
from the list price.

Dean made a purchase during the year and received an invoice with a list price of P600,000, a freight charge of
P15,000 and payment terms of 2/10, n/30.

What is the cost of the purchase?

a. 432,000
b. 447,000
c. 438,360
d. 435,000

Solution 26 -16 Answer b

List price 600,000

Trade discount ( 20% x 600,000) ( 120,000)

Balance 480,000
Trade discount ( 10% x 480,000) ( 48,000)

Invoice price 432,000

Freight charge 15,000

Total cost of purchase 447,000

Purchases are normally recorded at gross. Thus, the cash discount is ignored.
Problem 26- 17 ( AICPA ADAPTED)

On June 1, 2017, Pitt Company sold merchandise with a list price of P5,000,000 to Burr on account. Pitt
allowed trade discount of 30% and 20%.

On June 11, 2017, the customer paid in full.

Credit terms were 2/10 , n/30 and the sale was made FOB shipping point. Pitt prepaid P200,000 of delivery
costs for Burr as an accommodation.

1) What amount should be reported as sales revenue?

a. 5,000,000
b. 2,800,000
c. 3,500,000
d. 2,500,000

2) What amount was received by Pitt from Burr as remittance in full?

a. 2,744,000
b. 2,940,000
c. 2,944,000
d. 3,140,000

Solution 26-17 Question 1 Answer b Question 2 Answer c

List price 5,000,000

Trade discounts:
30% x 5,000,000 ( 1,500,000)
3,500,000
20% x 3,500,000 ( 700,000)

Invoice price – sales revenue 2,800,000

Cash discount (2% x 2,800,000) ( 56,000)

Net amount 2,744,000

Add: Reimbursement of delivery cost 200,000

Total remittance from Burr 2,944,000

Problem 26 -18( IAA)

On August 1, Stella Company recorded purchases of inventory of P800,000 and P1,000,000 under credit terms
of 2/15, net 30.

The payment due on the P800,000 purchase was remitted on August 16. The payment due on the P1,000,000
purchase was remitted on August 31.

Under the net method and the gross method, these purchases should be included at what respective amounts in
the determination of cost of goods available for sale?

Net method Gross method

a. 1, 784,000 1,764,000
b. 1,764,000 1,800,000
c. 1,764,000 1,784,000
d. 1,800,000 1,764,000

Solution 26 – 18 Answer c

Net method

Purchase( 800,000 + 1,000,000) 1,800,000

Purchase discount taken ( 2% x 800,000) ( 16,000)
Purchase discount not taken( 2% x 1,000,000) ( 20,000)

Net amount 1, 764,000

Under the net method, the purchase discount is deducted from purchases regardless of whether taken or not
taken.

Gross method

Purchases 1,800,000
Purchases discount taken ( 16,000)

Net purchases 1,784,000

Under the gross method, the purchases are recorded at gross and only the purchase discount taken is deducted
from purchases in determining cost of goods available for sale.
Problem 26 -19 ( AICPA ADAPTED)

Rabb Company records purchases at gross amount but wishes to change to recording purchases net of purchase
discounts, discounts available on purchases for the current year amount to P20,000. Of this amount, P2,000 is
still available in the accounts payable balance.

The balances in the accounts on December 31 before conversion are:

Purchases 1,000,000
Purchase discount taken’ 8,000
Accounts payable 300,000

What is the balance of accounts payable on December 31 after the conversion?

a. 298,000
b. 292,000
c. 288,000
d. 282,000

Solution 26-19 Answer a

Accounts payable at gross 300,000

Discount available in the accounts payable balance ( 2,000)

Accounts payable at net 298,000

Problem 26 -20 ( IAA)

Wine Company recorded purchases at net amount. On December 10, the entity purchases merchandise on
account, P4,000,000, terms 2/10, n/30. The entity returned P300,000 of the December 10 purchase and received
credit on account. The account had not been paid on December 31.

At what amount should the account payable be adjusted on December 31?

a. 74,000
b. 86,000
c. 80,000
d. 0

Solution 26-20 Answer a

Gross invoice 4,000,000

Purchase return ( 300,000)

Net purchase 3,700,000

Purchase discount lost (2% x 3,700,000) 74,000