Assignment Answer Key

Additional Explanation for Chapter 4

Problem 4-1
Data relating to Material B-1 during March 2010 are given below:
March 1 Beginning Balance 150 units @ P40.00 P 6,000
6 Purchase 200 units @ P40.50 P 8,100
12 Requisition 225 units
14 Purchase 250 units @ P41.00 P10,250
17 Requisition 200 units
31 Requisition 40 units
135 units Ending inventory
Required: Use FIFO and Weighted average to compute for the
ending inventory and cost of materials used in the production.
FIFO- Periodic
 Ending Inventory:
135 units @ P41 = P 5,535

 Cost of Materials Used:

Materials, beginning P 6,000
Purchases (P8,100 + P10,250) 18,350
Total Materials Available P 24,350
Materials, ending ( 5,535)
Cost of Materials Used P 18,815
FIFO- Perpetual

P18,815.00
Weighted Average -Periodic
Cost of Materials Used

Inventory – January 1 P 6,000.00

Purchases 18,350.00
Materials Available P24,350.00
Inventory – January 31 ( 5,478.30)
Cost of Materials used P18,871.70
Moving Average -Perpetual
Cost of Materials Used

Inventory – January 1 P 6,000.00

Purchases 18,350.00
Materials Available P24,350.00
Inventory – January 31 ( 5,502.35)
Cost of Materials used P18,847.65
Problem 4-2
LOWER OF TOTAL COST OR TOTAL NRV
LOWER OF TOTAL COST OR TOTAL NRV BY GROUP
Summary of Inventory Valuation:

MATERIAL BASIS VALUATION

Group I NRV P55,000.00
Group II NRV 14,950.00
Inventory valuation P69,950.00
SPECIFIC IDENTIFICATION Problem 1
AMG Manufacturing Company which uses the periodic
inventory system showed the following transactions during the
month of May.
Date Units Purchased Unit cost Units issued
5/1 BI 10 P15 -
5/5 20 20 -
5/15 - - 15
5/19 - - 10
5/24 15 18 -
5/30 - - 15

What is the cost of ending inventory under the specific

identification method, assuming that materials issued on 5/15
came from the 5/5 purchase, materials issued on 5/19 came
from beginning inventory, and those issued on 5/30 came from
the 5/5 and 5/24 purchases?
Suggested Solution:
ACCOUNTING FOR INVENTORY WRITEDOWN

If the cost is lower than net realizable value, there is

no accounting problem because the inventory is
measured at cost and the increase in value is not
recognized. (Cost < NRV)

If the net realizable value is lower than the cost, the
inventory is measured at net realizable value and the
decrease in value is recognized. (Cost > NRV)
METHODS OF ACCOUNTING FOR INVENTORY
WRITEDOWN
Direct Method or Cost of goods sold method
 The inventory is recorded at the lower of cost or net realizable value.
 This method is also known as cost of goods sold method because any
loss on inventory write-down is not accounted for separately but
buried in the cost of goods sold.

Allowance method or loss method

 The inventory is at cost and any loss on inventory writedown is
accounted for separately.
 This method is also known as loss method because a loss account,
“loss on inventory write-down” is debited and a valuation account,
“allowance for inventory write-down” is credited.
Illustration:

December 31, 2019 December 31, 2020

Inventory at Cost P360,000 P420,000
Inventory at Net Realizable Value 348,000 416,000
Computation for Inventory Write-down:
Cost - December 31, 2019 360,000
Net Realizable Value 348,000
Inventory Write-down 12,000
ACCOUNTING FOR INVENTORY WRITE-DOWN
DIRECT METHOD
 The inventory is recorded at lower of cost and net realizable value at year-
end.
Inventory – December 31, 2020 348,000
Income Summary 348,000

ALLOWANCE METHOD
 The inventory is recorded at cost at year-end.
Inventory – December 31, 2020 360,000
Income Summary 360,000
 The inventory write-down is accounted for separately:
Loss on inventory write-down 12,000
Allowance for Inventory Write-down 12,000
 INVENTORY MEASUREMENT (December 31,2020)

Cost
NRV
Inventory Write-down P 4,000

Allowance for Inventory WD, December 2020 P 4,000

Allowance for inventory WD, December 2019 (12,000)
Gain on reversal of inventory write-down P 8,000
Journal entry for Reversal of Inventory Write-
down

December 31, 2020:

Allowance for Inventory WD 8,000
Gain from reversal of Inventory WD 8,000
Greece Company provided the following data for the current
year:
Inventory –January 1
Cost P3,000,000
P200,000
Net realizable value 2,800,000
Net Purchases 8,000,000
Inventory- December 31
Cost 4,000,000
P300,000
Net realizable value 3,700,000

What amount should be reported as cost of goods sold?

ANSWER:
DIRECT METHOD:

Inventory, January 1 P 2,800,000

Net Purchases 8,000,000
Total P10,800,000
Inventory- December 31 (3,700,000)
Cost of Goods Sold P 7,100,000
 ANSWER:
ALLOWANCE METHOD:

Inventory, January 1 P 3,000,000

Net Purchases 8,000,000
Total P11,000,000
Inventory- December 31 (4,000,000)
Cost of Goods Sold P 7,000,000
Add: Loss on Inventory WD 100,000
Actual Cost of Goods Sold P 7,100,000
Illustration 2: (Problem 4-4)
The Joy Novelty Company uses a perpetual inventory system. On April 2019, its
statement of financial position included the following items related to the materials
inventory:

Materials Inventory at Cost P880,875

Less: Allowance for Inventory WD 61,980
Materials Inventory, @ LCNRV P818,895

Required:
Journal (adjusting) entries for the following assumptions:
1. After one year, on April 2020, the perpetual inventory account showed a balance
of P890,220. The net realizable value was P825,330.
2. Assume the same facts as #1, except that net realizable value was P870,165.
3. Assume the same facts as #1, except that net realizable value was P894,540.
Requirement 1:
After one year, on April 2020, the perpetual inventory account
showed a balance of P890,220. The net realizable value was
P825,330.

Loss on inventory write-down 2,910

Allowance for inventory write-down 2,910
To record loss resulting from decline in Net Realizable Value of
inventory.

Computation:
Inventory @ cost P890,220
Inventory @ NRV 825,330
Inventory Write-down P 64,890 > 61,980 = 2,910
Requirement 2:
Assume the same facts as #1, except that net realizable value was
P870,165.

Allowance for inventory write-down 41,925

Recovery from inventory write-down 41,925
To record recovery resulting from adjustment
of allowance account.

Computation:
Inventory @ cost P890,220
Inventory @ NRV 870,165
Inventory Write-down P 20,055 < 61,980 = 41,925
Requirement 3:
Assume the same facts as #1, except that net realizable value was
P894,540.

Allowance for inventory write-down 61,980

Recovery from inventory write-down 61,980
To record recovery resulting from adjustment
of allowance account.

Computation:
Inventory @ cost P890,220
Inventory @ NRV 894,540
Inventory Write-down 0 < 61,980 = 61,980
Illustration 3: (Problem 4-6)
“ If people are doubting how far
you can go, go so far that you
can’t hear them anymore.
-MICHELE RUIZ-
”
END OF PRESENTATION☺☺☺