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FINANCIAL ACCOUNTING AND REPORTING

INVENTORIES
Handout # 6453

Problem 1

Physical count / Unadjusted balance 6,000,000

Gods subject to bill and hold sales agreement ( 200,000)
Goods in transit purchased FOB shipping point 300,000
Adjusted balance 6,100,000

• Inventories shall include assets such as finished goods and merchandise inventory, work in
process inventory and raw materials and supplies.
• Inventory included: Goods included in the physical count but exclude goods held on consignment,
goods held on a bill and hold sales arrangement, custom made goods that are finished and
segregated and goods held as loan collateral. Goods in transit sold FOB Destination and
purchased FOB SP, out on consignment, out on trial sale, held by others for storage and
processing and goods held by salesmen and agents.

Problem 2

Invoice price 5,000,000

Import duties 400,000
Freight and insurance 600,000
Other handling cost 100,000
Commissions paid to sales agents 200,000
Total cost of purchase 6,300,000

• The costs of purchase of inventories comprise the purchase price, import duties and other
non-recoverable taxes and transport, handling and other costs directly attributable to the
acquisition of finished goods, materials and services. Trade discounts, rebates and other
similar items are deducted in determining the costs of purchase.
• Inventory cost should exclude:
a) Abnormal waste
b) Storage costs
c) Administrative overheads unrelated to production
d) Selling costs
e) Foreign exchange differences arising directly on the recent acquisition of inventories
invoiced in a foreign currency
f) Interest cost when inventories are purchased with deferred settlement terms.

Problem 3

Markup on goods out on consignment (1.4M / 140% x 40%) 400,000

Goods in transit purchased FOB destination 1,200,000
Goods held on consignment 900,000
Total reduction from cost 2,500,000

Problem 4

List price 5,000,000

20% trade discount (20% x 5M) (1,000,000)
4,000,000
10% trade discount (10% x 4M) ( 400,000)
Invoice price 3,600,000
5% Cash discount ( 180,000)
Net remittance on purchase 3,420,000
Freight paid by seller to be reimbursed 100,000
Total or full remittance from customer 3,520,000

Dec. 16, 2017

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Problem 5

Gross purchases 5,000,000

Less: Purchase discount taken (3M x 2%) 60,000
Net purchases under gross method 4,940,000

Gross purchases 5,000,000

Less: Total available purchase discount (5M x 2%) 100,000
Net purchases under net method 4,900,000

Under the net method, the purchase is initially recorded at 4,900,000. The purchase discount
that is not taken of 40,000 (2,000,000 x 2%) shall be expensed under the account title “discounts
forfeited”. This amount shall not be included in costs of goods sold.

Problem 6

Unadjusted accounts payable 2,200,000

Unrecorded purchase FOB shipping point 40,000
Purchase return already authorized ( 70,000)
Recording error (Debit balance) deducted from accounts payable 500,000
Adjusted balance 2,670,000

• The P70,000 purchase shall be a loss recognized by the buyer since title had passed to the
buyer once possession is taken by the common carrier or shipper. The buyer is obligated
to pay for the purchase and therefore recorded as a liability.

Problem 7

Unadjusted sales 2,000,000

Unrecorded purchase FOB shipping point 40,000
Sales return already authorized ( 15,000)
Adjusted balance 2,015,000

Problem 8

Journal Entries

Oct. 18, 2018

Cash 2,500,000
Deferred Sales 2,500,000

Dec. 15, 2018

Cash 1,250,000
Deferred Sales 1,250,000

Deferred Sales 2,500,000

Sales 2,500,000

Jan. 15, 2019

Cash 1,250,000
Deferred Sales 1,250,000
Sales 2,500,000

Dec. 16, 2017

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COST FLOW AND LCNRV

Handout # 6454

• Ending inventory and Cost of goods sold shall me measured using Specific Identification
(noninterchangeable Items), FIFO and Average.

• Under FIFO, Periodic and Perpetual will result in the same COGS and EI.

• Perpetual average is moving average because a new average cost shall be computed once a
purchase is made.

• Periodic average means that the average cost is only computed when a physical count is made. This
is also known as the weighted average.

Problem 1

FIFO Perpetual

1/1 Balance 1,500,000

1/5 Purchase 1,800,000
Total 3,300,000
1/15 COGS (a) 2,400,000
Balance 900,000
1/16 Sales return (b) 180,000
Total 1,080,000
1/25 Purchase 800,000
Total 1,880,000
1/26 Purchase return ( 400,000)
Ending inventory 1,480,000

(a) COGS (10,000 x 150) + (5,000 x 180) = 2,400,000

(b) Sales return (1,000 x 180) = 180,000
(c) Net COGS (2,400,000 – 180,000) = 2,220,000

FIFO Periodic

Beginning inventory 1,500,000

Net purchases (a) 2,200,000
TGAS 3,700,000
Less: Ending inventory (b) 1,480,000
COGS 2,220,000

(a) 1,800,000 + 800,000 – 400,000 = 2,200,000

(b) Ending units (10,000 + 10,000 – 15,000 + 1,000 + 4,000 – 2,000) 8,000 units
Cost of ending inventory (2,000 x 200) + (6,000 x 180) = 1,480,000

Average Periodic

Beginning inventory 1,500,000

Net purchases (a) 2,200,000
TGAS 3,700,000
Less: Ending inventory (b) 1,345,440
COGS 2,354,560

(a) 1,800,000 + 800,000 – 400,000 = 2,200,000

(b) Ending units (10,000 + 10,000 – 15,000 + 1,000 + 4,000 – 2,000) 8,000 units
Average cost (3,700,000 / 22,000 units) 168.18 per unit
Cost of ending inventory (8,000 x 168.18) = 1,345,440

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Average Perpetual

1/1 Balance 1,500,000

1/5 Purchase 1,800,000
Total 3,300,000
1/15 COGS (a) 2,475,000
Balance 825,000
1/16 Sales return (b) 165,000
Total 990,000
1/25 Purchase 800,000
Total 1,790,000
1/26 Purchase return (c) ( 400,000)
Ending inventory 1,390,000

(a) Average cost (3,300,000 / 20,000) 165 per unit

COGS (165 x 15,000) = 2,475,000
(b) Sales return (1,000 x 165) = 165,000
(c) Purchase return (2,000 x 200) = 400,000
Based on invoice price per unit.

Problem 2

Allowance Method

Beginning Ending
Cost 3,000,000 4,000,000
Less: Allowance 100,000 300,000
LCNRV / Carrying amount 2,900,000 3,700,000

• Loss on write-down (300,000 – 100,000) 200,000

Beginning inventory at cost 3,000,000

Net purchases 9,000,000
TGAS 12,000,000
Less: Ending inventory at cost 4,000,000
8,000,000
Loss on write-down 200,000
Costs of goods sold (total) 8,200,000

Direct Write-off Method

Beginning inventory at NRV 2,900,000

Net purchases 9,000,000
TGAS 11,900,000
Less: Ending inventory at NRV 3,700,000
COGS 8,200,000

Problem 3

Allowance Method

Beginning Ending
Cost 4,000,000 5,000,000
Less: Allowance 500,000 200,000
LCNRV / Carrying amount 3,500,000 4,800,000

• Gain on reversal of write-down (200,000 – 500,000) 300,000

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Beginning inventory at cost 4,000,000
Net purchases 20,000,000
TGAS 24,000,000
Less: Ending inventory at cost 5,000,000
19,000,000
Less: Gain on reversal 300,000
Costs of goods sold (total) 18,700,000

Direct Write-off Method

Beginning inventory at NRV 3,500,000

Net purchases 20,000,000
TGAS 23,500,000
Less: Ending inventory at NRV 4,800,000
COGS 18,700,000

• Inventories are measured at the LCNRV approach and is computed on an item by item
method to get the lowest value. The difference between the cost of ending inventory and the
LCNRV is charged to COGS.
• NRV is Estimated selling price less cost to complete and cost to sell.

Problem 4
A 2,625,000
B 1,600,000
C 1,600,000
D 1,800,000
LCNRV – Individual 7,625,000
Category 1 4,325,000
Category 2 3,400,000
LCNRV 7,725,000
Total - NRV 7,875,000

• Purchase commitment is a contract the specifies the quantity and price for a future purchase.
• If there is an intervening balance sheet date and the MV falls below the agreed price, a loss
shall be recognized. A gain is never recognized though if the market value is higher than the
agreed upon price.
• However, the cost of the inventory upon purchase shall be recognized at the lower of MV or
agreed price.
• This will result into a recovery of the loss or an additional loss depending if the MV increases
or further decreases.

Problem 5

Dec. 31, 2018 Market price (100,000 x 50) 5,000,000

Less: Purchase commitment price (100,000 x 55) 5,500,000
Loss on purchase commitment ( 500,000)

Mar. 31, 2019 Market price (100,000 x 53) 5,300,000

Less: Dec. 31, 2018 market price 5,000,000
Gain on purchase commitment 300,000

Problem 6

A (100 x 240k) 24,000,000

B(100 x 160k) 16,000,000
C (200 x 100k) 20,000,000
Total 60,000,000

Cost of A (12M + 3M) x (24/60) 6,000,000

Dec. 16, 2017

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GROSS PROFIT METHOD

a) GP Method: The COS is estimated by multiplying the Net Sales (Gross less S R&A or SR
only) by the cost percentage or by dividing NS by 1 plus the GP rate if it is based on cost.
This amount is deducted from TGAS to estimate the ending inventory.

RETAIL METHOD
b) Retail Method: The GAS at retail is computed and the following are deducted: Net sales
(same as above), Employee discounts and Normal Losses. The net amount is the EI at
retail which is multiplied to 3 types of cost ratio. (1) Average: GAS at cost / GAS at retail
after Net MD, (2) Conservative: GAS at cost / GAS at retail before Net MD and (3) FIFO:
Purchases at cost / Purchases at retail after net markdown.

BIOLOGICAL ASSETS

a) Biological assets should be measured on initial recognition and at subsequent reporting dates at fair
value less costs of disposal, unless fair value cannot be reliably measured.

b) Agricultural produce should be measured at fair value less costs of disposal at the point of
harvest. Because harvested produce is a marketable commodity, there is no 'measurement reliability'
exception for produce. Agricultural produce becomes inventory under IAS 2.

c) The gain on initial recognition of biological assets at fair value, and changes in fair value of biological
assets during a period, are reported in net profit or loss.

d) A gain on initial recognition of agricultural produce at fair value should be included in net profit or loss
for the period in which it arises.

e) All costs related to biological assets that are measured at fair value are recognized as expenses
when incurred, other than costs to purchase biological assets.

f) Bearer plant is a living plant that:

• is used in the production or supply of agricultural produce;
• is expected to bear produce for more than one period; and
• has a remote likelihood of being sold as agricultural produce, except for incidental scrap sales.

All of the above criteria need to be met for a biological asset to be considered a bearer plant.

g) Bearer plants include fruit bearing trees and plants that are perpetually harvested for vegetables.
Annual crops, trees grown as lumber and plants that have a more than remote likelihood of being
harvested and sold otherwise known as dual purpose plants are biological assets.

h) Bearer plants are accounted for under PAS 16 using the cost model, or the revaluation model.
Before bearer plants are able to bear agricultural produce (i.e. before maturity), they are accounted
for as self-constructed items of property, plant and equipment.

i) The agricultural produce of the bearer plant remains within the scope of PAS 41 and is therefore
accounted for at fair value. Meaning, the agricultural produce that is not yet harvested is accounted
for as a biological asset (measured at fair value less cost to sell) which is a separate asset from the
bearer plant.

j) When there is a production cycle of more than one year, an entity is encouraged to disclose, by
group or otherwise, the amount of change in fair value less costs to sell included in profit or loss due
to physical changes and due to price changes.

END

Dec. 16, 2017