PAGE 1

PRACTICAL ACCOUNTING PROBLEMS I SUGGESTED SOLUTIONS

Inventory
1. Physical count Goods held for customer included in count Cost of undelivered goods excluded from the count Goods in transit purchased FOB seller/shipping point Goods held by an outside processor Goods out on consignment including freight (1,000,000 / 125%) + 50,000 Correct amount of inventory Invoice price Direct cost of purchase Total cost Net selling price (5,000,000 x 80% x 90%) Less: Discount (3,600,000 x 5%) Proceeds from sale Add: Freight paid by seller Total proceeds Journal entry on December 31, 2009: Loss on purchase commitment 500,000 Estimated liability on purchases commitment (55 50) x 100,000 barrels Journal entry on March 31, 2010: Purchases (100,000 x 55) Estimated liability on purchase commitment Cash Gain on purchase commitment 5,500,000 500,000 5,500,000 500,000 A 500,000 5,000,000 (150,000) 200,000 300,000 400,000 850,000 6,600,000 5,000,000 1,300,000 6,300,000 3,600,000 180,000 3,420,000 100,000 3,520,000

2.

3.

4.

The gain is only the recovery of the loss recognized in 2013 because the cost of the purchase can not exceed the cash price of P5,500,000. 5. Purchases under net method (5M x 98%) Purchases under gross method (5M (3M x 2%)) Unadjusted account payable Goods lost in transit purchased FOB SP Purchased return authorized by vendor Debit balance should be recorded as a receivable Adjusted balance Unadjusted net sales Sales return already authorized by the entity Unrecorded sales already shipped FOB SP Undelivered merchandise Adjusted balance Sales revenue (units delivered) 50,000 x 50 4,900,000 4,940,000 2,200,000 40,000 ( 70,000) 500,000 2,670,000 9,200,000 ( 200,000) 300,000 ( 400,000) 8,900,000 2,500,000 C

6.

7.

D B

8.

5715 and 5716

PAGE 2
INVENTORY VALUATION 1. FIFO TGAS (1.5M + 1.8M + 800 100) Less: Ending inventory* Cost of goods sold Jan. 5 purchase (6,000 x 180) Jan. 25 purchase (3,500 x 200) Cost of ending inventory (23,500 14,000 = 9,500) MOVING AVERAGE Balance 1/1 Purchase 1/5 Balance Sold on 1/15 (net) Balance Purchased on 1/31(net) Balance Units 10,000 10,000 20,000 (14,000) 6,000 3,500 9,500 Total Cost 1,500,000 1,800,000 3,300,000 (2,310,000) 990,000 700,000 1,690,000 Unit Cost 150 180 165 A 165 200 178 4,000,000 1,616,995 2,383,005 Direct write-off method 2,800,000 8,000,000 10,800,000 3,700,000 B

4,000,000 1,780,000 2,220,000 1,080,000 700,000 1,780,000

WEIGHTED AVERAGE TGAS (1.5M + 1.8M + 800 100) Less: Ending inventory (9,500 X 170.21*) Cost of goods sold * 4M / 23,500 UNITS = 170.21 PER UNIT 2. Beginning inventory Purchases Total goods available for sale Ending inventory Cost of sale before loss on writedown Loss on write down Total cost of sales Allowance Method 3,000,000 8,000,000 11,000,000 ( 4,000,000) 7,000,000 100,000 7,100,000

A A

7,100,000

Under the direct write-off method the inventory is recorded at the net realizable value if it is lower than cost but under the allowance method which is the benchmark treatment, the physical count is recorded at cost first then a loss is recorded and allowance account is provided. The effect of this method is more relevant and reliable to the users of the financial statements because will show that P7,000,000 was the cost that was sold while P100,000 is also an expense, but not due to sale instead due to the decline in value of inventory. However as seen, both methods produce the same cost of sales because as mentioned in PAS 2, losses on the decline of value of inventory and all other types of losses should be recognized as inventory that is expensed for the period. 3. Selling price Less: Production cost to complete Net realizable value 4,000,000 1,500,000 2,500,000

4.

NRV of product 1 (4M 1.2M) 2,800,000 Cost of product 2 3,600,000 Value of inventory at year end 6,400,000 A *Inventories are value at the lower of cost or NRV on an item by item approach in order to have the most conservative value Net Income under LIFO Increase of BI under FIFO Increase of EI under FIFO Net income under FIFO Unadjusted LIFO reserve Adjustment to LIFO reserve and COGS (SQUEEZED) Required LIFO reserve (375K 320K) Adjusted COGS for LIFO reserve (3.5M + 20,000) Total selling price (100 x 240K) + (100 x 160K) + (200 x 100K) Cost of Class A Lots (24/60) x (12M + 3M) 3,000,000 ( 500,000) 600,000 3,100,000 35,000 20,000 55,000 3,520,000 A 60M 6,000,000 C

5.

6.

7.

--END--

5715 and 5716