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INVENTORY

VALUATION

FINACC 1

REFERENCES

TOA VOL1

VALIX

PAS/IAS 2
PRACACC 1

OF INVENTORY

A.
PAS 2

comprises:

Brilliant Company has incurred the following costs during the


current year:
Cost of purchases based on vendors invoices
5,000,000
Trade discounts 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

Brilliant Company has incurred the following costs during the


current year:
Cost of purchases based on vendors invoices
5,000,000
Trade discounts 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

Brilliant Company has incurred the following costs


current year:
Cost of purchases based on vendors invoices
Trade discounts on purchases already
deducted from vendors invoices
Import duties
Freight and insurance on purchases
Other handling costs relating to imports
Salaries of accounting department
Brokerage commission paid to agents
for arranging imports
Sales commission paid to sales agents
After-sales warranty costs
Total Cost

during the
5,000,000
500,000
400,000
1,000,000
100,000
600,000

200,000
300,000
250,000
6,700,000

Brilliant Company has incurred the following costs


current year:
Cost of purchases based on vendors invoices
Trade discounts on purchases already
deducted from vendors invoices
Import duties
Freight and insurance on purchases
Other handling costs relating to imports
Salaries of accounting department
Dr.
Inventory
6,700,000
Brokerage commission paid to agents
Cr.
Cash
6,700,000
for arranging imports
<To record the purchased inventories>
Sales commission paid to sales agents
After-sales warranty costs
Total Cost

during the
5,000,000
500,000
400,000
1,000,000
100,000
600,000

200,000
300,000
250,000
6,700,000

Based on a physical inventory taken on December 31, 2011,


Chewy Co. determined its chocolate inventory on a FIFO
basis at PHP 5,200,000 with a replacement cost of PHP
4,000,000. Chewy estimated that, after further processing
costs of PHP 2,400,000, the chocolate could be sold as
finished candy bars for PHP 8,000,000. Chewys normal profit
margin is 10% of sales. What amount should Chewy report as
chocolate inventory on December 31, 2011?

Based on a physical inventory taken on December 31, 2011,


Chewy Co. determined its chocolate inventory on a FIFO
basis at PHP 5,200,000 with a replacement cost of PHP
4,000,000. Chewy estimated that, after further processing
costs of PHP 2,400,000, the chocolate could be sold as
finished candy bars for PHP 8,000,000. Chewys normal profit
margin is 10% of sales. What amount should Chewy report as
chocolate inventory on December 31, 2011?
Cost of Inventory
Estimated Sales Price
Cost to Complete Processing Cost
Net Realizable Value

5,200,000
8,000,000
(2,400,000)
5,600,000

Based on a physical inventory taken on December 31, 2011,


Chewy Co. determined its chocolate inventory on a FIFO
basis at PHP 5,200,000 with a replacement cost of PHP
4,000,000. Chewy estimated that, after further processing
costs of PHP 2,400,000, the chocolate could be sold as
finished candy bars for PHP
Chewys normal profit
No8,000,000.
entry.
margin is
10% of is
sales.
What
amountatshould
Chewy report as
Inventory
already
valuated
PHP 5,200,000.
chocolate inventory on December 31, 2011?
Cost of Inventory
Estimated Sales Price
Cost to Complete Processing Cost
Net Realizable Value

5,200,000
8,000,000
(2,400,000)
5,600,000

when sold, the objective:

B.
PAS 2

B.
PAS 2

C.
PAS 2

METHODS

FIFO
the goods first purchased are first sold.
the goods remaining are most

recently purchased/produced
in accordance with
ordinary merchandising procedure
FAVORS
THE
BALANCE
SHEET
inventory at current replacement cost

FIFO

FIFO
FAVORS THE BALANCE SHEET:

FIFO
OBJECTION:

FIFO
EFFECT:

The following data pertain to an inventory item:


Date
January 1
January 8
January 18
January 22
January 31

Transaction
Beg. Bal.
Sale
Purchase
Sale
Purchase

Units
800

Unit
Cost
200

Total
Cost
160,000

Sales
(in units)
500

700

210

147,000
800

500

The ending inventory is 700 units.

220

110,000

Date
January 1
January 8
January 18
January 22
January 31

Transaction
Beg. Bal.
Sale
Purchase
Sale
Purchase

Unit
Cost
200

Units
800

Total
Cost
160,000

Sales
(in units)
500

700

210

147,000
800

500

220

110,000

Computing for Cost of Goods Sold:


Source
For January 8 sale:

Units
500

Unit Cost

Total Cost

Date
January 1
January 8
January 18
January 22
January 31

Transaction
Beg. Bal.
Sale
Purchase
Sale
Purchase

Unit
Cost
200

Units
300

Total
Cost
160,000

Sales
(in units)
500

700

210

147,000
800

500

220

110,000

Computing for Cost of Goods Sold:


Source
For January 8 sale:
From January 1 Balance
For January 22 sale:

Units

Unit Cost

Total Cost

500

200

100,000

800

Date
January 1
January 8
January 18
January 22
January 31

Transaction
Beg. Bal.
Sale
Purchase
Sale
Purchase

Unit
Cost
200

Units
0

Total
Cost
160,000

Sales
(in units)
500

200

210

147,000
800

500

220

110,000

Computing for Cost of Goods Sold:


Source
For January 8 sale:
From January 1 Balance
For January 22 sale:
From January 1 Balance
From January 18 Balance

Units

Unit Cost

Total Cost

500

200

100,000

300
500

200
210

60,000
105,000

Date
January 1
January 8
January 18
January 22
January 31

Transaction
Beg. Bal.
Sale
Purchase
Sale
Purchase

Unit
Cost
200

Units
0

Total
Cost
160,000

Sales
(in units)
500

200

210

147,000
800

500

220

110,000

Computing for Cost of Goods Sold:


Source
For January 8 sale:
From January 1 Balance
For January 22 sale:
From January 1 Balance
From January 18 Balance
Cost of Goods Sold

Units

Unit Cost

Total Cost

500

200

100,000

300
500

200
210

60,000
105,000
265,000

Date
January 1
January 8
January 18
January 22
January 31

Transaction
Beg. Bal.
Sale
Purchase
Sale
Purchase

Unit
Cost
200

Units
800

Total
Cost
160,000

Sales
(in units)
500

700

210

147,000
800

500

220

110,000

Computing for Ending Inventory:


Source
From January 18 Purchase
From January 31 Purchase
Ending Inventory

Units
200
500
700

Unit Cost
210
220

Total Cost
42,000
110,000
152,000

Date
Transaction
January 1
Beg. Bal.
January 8
Sale
January 18
Purchase
January 22
Sale
January 31
Purchase
Ending Inventory

Units
800

Unit
Cost
200

Total
Cost
160,000

Sales
(in units)
500

700

210

147,000
800

500
700

220

110,000
152,000

Computing for Cost of Goods Sold:


Inventory January 1
Purchases (147,000 + 110,000)
Goods available for sale
Inventory January 31
Cost of Goods Sold
Cost of Goods Sold

160,000
257,000
417,000
(152,000)
265,000
265,000

Assuming theres no other inventory related transactions


previously than those in January; if January 31 is the end of
reporting period and the ending inventory is already counted:
Dr.
Cr.

Inventory January 31
Cost of Goods Sold
Inventory Feb 1
Net Purchases

152,000
265,000
160,000
257,000

!! Remember: COGS is computed as a balancing figure


when Ending Inventory is already counted at the end of
reporting period and after determining the Net
Purchases (Purchases - Dscts, Returns, Allowances).

OR:
Dr.
Cr.

Inventory January 31
Income Summary

152,000
152,000

!! COGS will already be inclusive in the Income


Summary Account as you will ultimately close the
Beginning Inventory and Purchases Accounts with the
Income Summary Account.

This requires the preparation of stock card:


Date
Jan 1
Jan 8
Jan 18

Units

700

Purchases
Unit
Cost

210

Total
Cost

500

220

Total
Cost

500

200

100,000

300
500

200
210

60,000
105,000

147,000

Jan 22
Jan 31

Units

Sales
Unit
Cost

110,000

800
300
300
700

Balance
Unit
Cost
200
200
200
210

Total
Cost
160,000
60,000
60,000
147,000

200
200
500

210
210
220

42,000
42,000
110,000

Units

This requires the preparation of stock card:


Date
Jan 1
Jan 8
Jan 18

Units

700

Purchases
Unit
Cost

210

Total
Cost

500

220

Total
Cost

500

200

100,000

300
500

200
210

60,000
105,000

147,000

Jan 22
Jan 31

Units

Sales
Unit
Cost

110,000

800
300
300
700

Balance
Unit
Cost
200
200
200
210

Total
Cost
160,000
60,000
60,000
147,000

200
200
500

210
210
220

42,000
42,000
110,000

Units

This requires the preparation of stock card:


Date
Jan 1
Jan 8
Jan 18

Units

700

Purchases
Unit
Cost

210

Total
Cost

500

220

Total
Cost

500

200

100,000

300
500

200
210

60,000
105,000

147,000

Jan 22
Jan 31

Units

Sales
Unit
Cost

110,000

Cost of Goods Sold:


January 8 sale
January 22 sale (60,000 + 105,000)
Total Cost of Goods Sold

800
300
300
700

Balance
Unit
Cost
200
200
200
210

Total
Cost
160,000
60,000
60,000
147,000

200
200
500

210
210
220

42,000
42,000
110,000

Units

100,000
165,000
265,000

We record COGS by matching with Sales Revenue.


For example:
January 8 transaction:
Dr.
Cash or Accounts Receivable
Cr.
Sales Revenue

Dr.
Cr.

Cost of Goods Sold


Inventory

xxxxx
xxxxx

100,000
100,000

!! No need for an entry to record an Ending Inventory at


the end of reporting period since Inventory is adjusted
on every transaction affecting it.

WTD AVE
WEIGHTED AVERAGE UNIT COST FORMULA

(cost of beginning inventory + total cost of purchases during


the period) / (total units purchased + units in the beginning
inventory)
the average unit cost is multiplied by the units on hand

TO GET INVENTORY VALUE

divide the total cost of goods available for sale by the


total number of units available for sale

The following data pertain to an inventory item:


Date
January 1
January 18
January 31

Transaction
Beginning Balance
Purchase
Purchase

The ending inventory is 700 units.

Units
800
700
500

Unit
Cost
200
210
220

Total
Cost
160,000
147,000
110,000

The following data pertain to an inventory item:


Date
Transaction
January 1
Beginning Balance
January 18
Purchase
January 31
Purchase
Total Goods Available for Sale

Units
800
700
500
2,000

Unit
Cost
200
210
220

Total
Cost
160,000
147,000
110,000
417,000

The following data pertain to an inventory item:


Date
Transaction
January 1
Beginning Balance
January 18
Purchase
January 31
Purchase
Total Goods Available for Sale

Weighted Average Unit Cost (417,000/2,000)


Inventory Cost (700 x 208.50)

Units
800
700
500
2,000

Unit
Cost
200
210
220

Total
Cost
160,000
147,000
110,000
417,000

208.50
145,950

The following data pertain to an inventory item:


Date
Transaction
January 1
Beginning Balance
January 18
Purchase
January 31
Purchase
Total Goods Available for Sale

Weighted Average Unit Cost (417,000/2,000)


Inventory Cost (700 x 208.50)

Units
800
700
500
2,000

Unit
Cost
200
210
220

Total
Cost
160,000
147,000
110,000
417,000

208.50
145,950

Computing for Cost of Goods Sold:


Inventory January 1
Purchases (147,000 + 110,000)
Goods available for sale
Inventory January 31
Cost of Goods Sold

160,000
257,000
417,000
(145,950)
271,050

The following data pertain to an inventory item:


Unit
Total
Date
Transaction
Units
Cost
Cost
January 1
Beginning Balance
800
200
160,000
January 18
Purchase
700
210
147,000
Inventory
January 31 500
145,950
JanuaryDr.
31
Purchase
220
110,000
Total
for Sale
417,000
Cr. Goods Available
Income
Summary 2,000
145,950

Weighted Average Unit Cost (417,000/2,000)


Inventory Cost (700 x 208.50)

208.50
145,950

Computing for Cost of Goods Sold:


Inventory January 1
Purchases (147,000 + 110,000)
Goods available for sale
Inventory January 31
Cost of Goods Sold

160,000
257,000
417,000
(145,950)
271,050

WTD AVE
When weighted average is used in conjunction with perpetual system,

it will be known as MOVING AVERAGE METHOD

weighted average may be calculated on a periodic basis


or as each additional shipment is received

a new weighted average unit cost is computed after every purchase

requires keeping of inventory stock card in order to monitor


moving unit cost after every purchase

This requires the preparation of stock card:


Date
Jan 1
Jan 8

Transaction
Balance
Sale
Balance

Units
800
(500)
300

Unit Cost
200
200
200

Total Cost
160,000
(100,000)
60,000

This requires the preparation of stock card:


Date
Jan 1
Jan 8
Jan 18

Transaction
Balance
Sale
Balance
Purchase

Units
800
(500)
300
700

Unit Cost
200
200
200
210

Total Cost
160,000
(100,000)
60,000
147,000

This requires the preparation of stock card:


Date
Jan 1
Jan 8
Jan 18

Transaction
Balance
Sale
Balance
Purchase
Total

Units
800
(500)
300
700
1000

Unit Cost
200
200
200
210

Total Cost
160,000
(100,000)
60,000
147,000
207,000

This requires the preparation of stock card:


Date
Jan 1
Jan 8
Jan 18

Transaction
Balance
Sale
Balance
Purchase
Total

Units
800
(500)
300
700
1000

Unit Cost
200
200
200
210
207

Total Cost
160,000
(100,000)
60,000
147,000
207,000

This requires the preparation of stock card:


Date
Jan 1
Jan 8
Jan 18
Jan 22

Transaction
Balance
Sale
Balance
Purchase
Total
Sale
Balance

Units
800
(500)
300
700
1000
(800)
200

Unit Cost
200
200
200
210
207
207
207

Total Cost
160,000
(100,000)
60,000
147,000
207,000
(165,600)
41,400

This requires the preparation of stock card:


Date
Jan 1
Jan 8
Jan 18
Jan 22
Jan 31

Transaction
Balance
Sale
Balance
Purchase
Total
Sale
Balance
Purchase

Units
800
(500)
300
700
1000
(800)
200
500

Unit Cost
200
200
200
210
207
207
207
220

Total Cost
160,000
(100,000)
60,000
147,000
207,000
(165,600)
41,400
110,000

This requires the preparation of stock card:


Date
Jan 1
Jan 8
Jan 18
Jan 22
Jan 31

Transaction
Balance
Sale
Balance
Purchase
Total
Sale
Balance
Purchase
Total

Units
800
(500)
300
700
1000
(800)
200
500
700

Unit Cost
200
200
200
210
207
207
207
220

Total Cost
160,000
(100,000)
60,000
147,000
207,000
(165,600)
41,400
110,000
151,400

This requires the preparation of stock card:


Date
Jan 1
Jan 8
Jan 18
Jan 22
Jan 31

Transaction
Balance
Sale
Balance
Purchase
Total
Sale
Balance
Purchase
Total

Units
800
(500)
300
700
1000
(800)
200
500
700

Unit Cost
200
200
200
210
207
207
207
220
216.29

Total Cost
160,000
(100,000)
60,000
147,000
207,000
(165,600)
41,400
110,000
151,400

This requires the preparation of stock card:


Date
Jan 1
Jan 8
Jan 18
Jan 22
Jan 31

Transaction
Balance
Sale
Balance
Purchase
Total
Sale
Balance
Purchase
Total

Cost of Goods Sold

Units
800
(500)
300
700
1000
(800)
200
500
700

Unit Cost
200
200
200
210
207
207
207
220
216.29

Total Cost
160,000
(100,000)
60,000
147,000
207,000
(165,600)
41,400
110,000
151,400

265,600

Match journal entries on inventories for each transactions.

PROS

CONS

LIFO
the goods last purchased are first sold.
the goods remaining are those

first purchased or produced


FAVORS
THE
INCOME
STATEMENT
matching of current cost against current revenue

LIFO
FAVORS THE INCOME STATEMENT:

LIFO
FAVORS THE INCOME STATEMENT:

LIFO
OBJECTION:

LIFO
OBJECTION:

LIFO
EFFECT:

The following data pertain to an inventory item:


Date
January 1
January 8
January 18
January 22
January 31

Transaction
Beg. Bal.
Sale
Purchase
Sale
Purchase

Units
800

Unit
Cost
200

Total
Cost
160,000

Sales
(in units)
500

700

210

147,000
800

500

The ending inventory is 700 units.

220

110,000

The following data pertain to an inventory item:


Date
January 1
January 8
January 18
January 22
January 31

Transaction
Beg. Bal.
Sale
Purchase
Sale
Purchase

Units
800

Unit
Cost
200

Total
Cost
160,000

Sales
(in units)
500

700

210

147,000
800

500

The ending inventory is 700 units.

220

110,000

The following data pertain to an inventory item:


Date
January 1
January 8
January 18
January 22
January 31

Transaction
Beg. Bal.
Sale
Purchase
Sale
Purchase

Units
800

Unit
Cost
200

Total
Cost
160,000

Sales
(in units)
500

700

210

147,000
800

500

220

110,000

The ending inventory is 700 units.


From January 1 Balance

Units
700

Unit Cost
200

Total Cost
140,000

The following data pertain to an inventory item:


Date
January 1
January 8
January 18
January 22
January 31

Transaction
Beg. Bal.
Sale
Purchase
Sale
Purchase

From January 1 Balance

Units
800

Unit
Cost
200

Total
Cost
160,000

Sales
(in units)
500

700

210

147,000
800

500

220

700

200

110,000

140,000

Computing for Cost of Goods Sold:


Inventory January 1
Purchases (147,000 + 110,000)
Goods available for sale
Inventory January 31
Cost of Goods Sold

160,000
257,000
417,000
(140,000)
277,000

The following data pertain to an inventory item:


Date
January 1
January 8
Dr.
January
18
January
22
Cr.
January 31

Unit
Cost
200

Total
Cost
160,000

Sales
(in units)

Transaction
Units
Beg. Bal.
800
Sale
500
Inventory
31 210 140,000
Purchase January
700
147,000
SaleIncome Summary
140,000 800
Purchase
500
220
110,000

From January 1 Balance

700

200

140,000

Computing for Cost of Goods Sold:


Inventory January 1
Purchases (147,000 + 110,000)
Goods available for sale
Inventory January 31
Cost of Goods Sold

160,000
257,000
417,000
(140,000)
277,000

This requires the preparation of stock card:


Date
Jan 1
Jan 8
Jan 18

Units

700

Purchases
Unit
Cost

210

Total
Cost

500

220

Total
Cost

500

200

100,000

700
100

210
200

147,000
20,000

147,000

Jan 22
Jan 31

Units

Sales
Unit
Cost

110,000

800
300
300
700

Balance
Unit
Cost
200
200
200
210

Total
Cost
160,000
60,000
60,000
147,000

200
200
500

200
200
220

40,000
40,000
110,000

Units

This requires the preparation of stock card:


Date
Jan 1
Jan 8
Jan 18

Units

700

Purchases
Unit
Cost

210

Total
Cost

500

220

Total
Cost

500

200

100,000

700
100

210
200

147,000
20,000

147,000

Jan 22
Jan 31

Units

Sales
Unit
Cost

110,000

800
300
300
700

Balance
Unit
Cost
200
200
200
210

Total
Cost
160,000
60,000
60,000
147,000

200
200
500

200
200
220

40,000
40,000
110,000

Units

This requires the preparation of stock card:


Date
Jan 1
Jan 8
Jan 18

Units

700

Purchases
Unit
Cost

210

Total
Cost

500

220

Total
Cost

500

200

100,000

700
100

210
200

147,000
20,000

147,000

Jan 22
Jan 31

Units

Sales
Unit
Cost

110,000

Cost of Goods Sold:


January 8 sale
January 22 sale (147,000 + 20,000)
Total Cost of Goods Sold

800
300
300
700

Balance
Unit
Cost
200
200
200
210

Total
Cost
160,000
60,000
60,000
147,000

200
200
500

200
200
220

40,000
40,000
110,000

Units

100,000
167,000
267,000

This requires the preparation of stock card:


Date

Units

Purchases
Unit
Cost

Jan 1
Jan 8
Jan 18

Ending Inventory
210
COGS700

Total
Cost

500
140,000
147,000
277,000

Jan 22
Jan 31

Units

700
100
500

220

Sales
Unit
Cost

Total
Cost

800
300
300
700

Balance
Unit
Cost
200
200
200
210

Total
Cost
160,000
60,000
60,000
147,000

200
200
500

200
200
220

40,000
40,000
110,000

Units

200
100,000
Ending
Inventory
COGS
210
200

147,000
20,000

110,000

Cost of Goods Sold:


January 8 sale
January 22 sale (147,000 + 20,000)
Total Cost of Goods Sold

150,000
267,000

100,000
167,000
267,000

looking back

C.
PAS 2

what is

SPECIFIC

IDENTIFICATION

what is

SPECIFIC

IDENTIFICATION

what is

SPECIFIC

IDENTIFICATION

what is

SPECIFIC

IDENTIFICATION

what is

SPECIFIC

IDENTIFICATION

Montessa Co. is a business dedicated to manufacture and sell


furniture ordinarily to individual customers. Suppose that
Montessa Co. entered a contract with Dan Guerra Co. on a
major project to build a themed museum wherein it is
stipulated that Montessa Co. will supply the furniture needed
(e.g. display tables, chairs, etc.).
Given that this project that Montessa Co. entered into asks
the company to make inventories that are not ordinarily
interchangeable, and that should be segregated because
these inventories are dedicated to a specific project,
specific identification method of inventory valuation should be
used.

Lets say that the costs of the finished furniture are as follows:

P 20,000

P 100,000

P 10,000

P 50,000

Simply calculate the units with their prices.


For example, I sold 2
COGS?

and 1

. How much is my

Lets say that the costs of the finished furniture are as follows:

P 20,000

P 100,000

P 10,000

P 50,000

Simply calculate the units with their prices.


For example, I sold 2
COGS? P 90,000

and 1

. How much is my

Lets say that the costs of the finished furniture are as follows:

P 20,000

P 100,000

P 10,000

P 50,000

Simply calculate the units with their prices.


Now, I checked my inventory and I still had 5
hand. How much is my Ending Inventory?

on

Lets say that the costs of the finished furniture are as follows:

P 20,000

P 100,000

P 10,000

P 50,000

Simply calculate the units with their prices.


Now, I checked my inventory and I still had 5
hand. How much is my Ending Inventory? P 500,000

on

PROS

CONS

NET
REALIZABLE
VALUE

NET
REALIZABLE
VALUE

NET
REALIZABLE
VALUE

NET
REALIZABLE
VALUE

DETERMINATION

OF NRV

DETERMINATION

OF NRV

DETERMINATION

OF NRV

DETERMINATION

OF NRV

DETERMINATION

OF NRV

The inventory is recorded at lower of cost or NRV. Any loss


on inventory writedown is not accounted for separately but
buried in the cost of goods sold.

The inventory is recorded at cost and any loss on inventory


writedown is accounted for separately. A loss account loss
on inventory writedown is debited and a valuation account
allowance for inventory writedown is credited.

In subsequent years, this allowance account is adjusted


upward or downward depending on the difference between
the cost and NRV of the inventory at year-end.

If the required allowance increases, an additional loss is


recognized. If the required allowance decreases, a gain on
reversal of inventory writedown is recorded. However, the
gain is limited only to the extent of the allowance balance.

Preferably, the allowance method is used in order that the


effects of writedown and reversal of writedown can be clearly
identified.
PAS 2 requires disclosure of the amount of any inventory
writedown and the amount of any reversal of inventory
writedown.

The inventory records show the following data on December


31, 2011.
Materials
#1
#2
#3
Goods in process
X
Y
Finished goods
A
B

Units

Unit Cost

NRV

1,000
3,000
2,000

11
23
30

10
25
32

5,000
3,000

40
50

38
52

2,000
2,000

75
80

73
83

Computing for Total Cost and NRV:


Materials
#1
#2
#3
Goods in process
X
Y
Finished goods
A
B
Total

Total Cost

NRV

Lower

11,000
69,000
60,000

10,000
75,000
64,000

10,000
69,000
60,000

200,000
150,000

190,000
156,000

190,000
150,000

150,000
160,000
800,000

146,000
166,000

146,000
160,000
785,000

Computing for Total Cost and NRV:


Dr.
Inventory December 31, 2011
Total Cost
Cr.
Income Summary

785,000
NRV
Lower
785,000

Materials
#1
11,000
10,000
10,000
#2
69,000
75,000
69,000
#3
60,000
64,000
60,000
Dr.
December 31, 2011 800,000
Goods inInventory
process
X
200,000
190,000800,000
190,000
Cr.
Income Summary
Y
150,000
156,000
150,000
FinishedLoss
goodson Inventory Writedown
Dr.
15,000
A
150,000
Cr.
Allowance for Inv.
Writedown146,00015,000146,000
B
160,000
166,000
160,000
Total
800,000
785,000

The loss on inventory writedown is included in the


computation of COGS. The allowance for inventory
writedown is presented as deduction from inventory:
Inventory December 31, 2011, at cost
Allowance for Inventory writedown
Net Realizable Value

800,000
(15,000)
785,000

Assume on December 31, 2012, the total cost of the inventory is


PHP 1,000,000 and the NRV is PHP 990,000:
Direct Method
Dr. Inventory December 31, 2012
Cr.
Income Summary

990,000
990,000

Allowance Method
Cost
NRV
Required allowance for 2012
2011 Allowance Balance
Decrease in Allowance

1,000,000
990,000
10,000
(15,000)
(5,000)

The decrease in allowance is a reversal of the previous


inventory writedown:

Dr.
Cr.

Allowance for inv. Writedown


5,000
Gain on reversal of inv. Writedown
5,000

The gain on reversal of inventory writedown is presented as a


deduction from COGS.

STANDARD
COSTS

STANDARD
COSTS

STANDARD
COSTS

relative sales

PRICE METHOD

relative sales

PRICE METHOD

ILLUSTRATION
Products A, B, and C are purchased at a basket price of PHP
3,000,000. Assume that the said products have the following
sales price: A: PHP 500,000; B: PHP 1,500,000; and C: PHP
3,000,000.

relative sales

PRICE METHOD

The cost of each product is computed as follows:


Product A
Product B
Product C
Total

500,000
1,500,000
3,000,000
5,000,000

5/50 x 3,000,000
300,000
15/50 x 3,000,000
900,000
30/50 x 3,000,000 1,800,000
3,000,000

PURCHASE COMMITMENTS
Are obligations of the entity to acquire certain goods
sometime in the future at a fixed price and fixed
quantity
A purchase contract has already been made for
future delivery of goods fixed in price and in
quantity

If significant or unusual, disclosure is required in the


notes
Losses which are expected to arise from firm and
non-cancellable commitments shall be recognized

PURCHASE COMMITMENTS
If there is a decline in purchase price after a purchase
commitment has been made, a loss is recorded in the
period of the price decline.
The fall in purchase price as against the agreed price
is accounted for as debit to loss on purchase
commitments and credit to an estimated liability.

If loss on purchase commitment is material and actual


in the sense that the purchase price falls below the
agreed price at the end of the reporting period, the
amount of the loss shall be recognized.

The contract purchase price is PHP 500,000 and the


replacement cost at year-end is PHP 450,000. The market
decline of PHP 50,000 is recorded as follows:
Dr. Loss on purchase commitment
50,000
Cr.
Estimated liability for purchase commitment

50,000

The loss on purchase commitment is classified as other


expense and the estimated liability for purchase
commitment is classified as current liability.

When the actual purchase is made in the subsequent period


and the current replacement cost drops further to PHP
420,000, the entry is:
Dr. Purchases
Loss on Purchase commitment
Estimated liability for purchase
commitment
Cr.
Account Payable

420,000
30,000
50,000
500,000

Accordingly, if market price rises by the time the entity


makes the purchase, a gain on purchase commitment would
be recorded.

However, the amount of gain to be recognized is limited to


the loss on purchase commitment previously recorded.

Thus, if replacement cost of the purchase commitment is


PHP 600,000 when the actual purchase is made, the entry to
record the actual purchase is:
Dr. Purchases
500,000
Estimated liability for purchase
commitment
50,000
Cr.
Accounts payable
500,000
Gain on purchase commitment 50,000
The gain on purchase commitment is classified as other
income.

And if the replacement cost of the purchase commitment is


PHP 480,000 when the actual purchase is made, the entry to
record the actual purchase is:

Dr. Purchases
480,000
Estimated liability for purchase
commitment
50,000
Cr.
Accounts payable
500,000
Gain on purchase commitment 30,000

DISCLOSURES IN F/S

DISCLOSURES IN F/S

SPECIAL
CASES

Agricultural, Forest and Mineral


Products

Commodities of Broker-Traders

Commodities of Broker-Traders

END.

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