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(from Scribd: https://www.scribd.com/document/605471889/QUIZ-CHAPTER-7-INVENTORIES-IA-1)

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Question 1
A VAT-registered entity purchases inventory. The invoice price of the inventory includes
payment for VAT. The entity should:
a. include the VAT paid as part of the cost of the inventory.
b. exclude the VAT paid and record it under the VAT payable account.
c. exclude the VAT paid and record it under the Input VAT account.
d. ignores the VAT payment and disclose it only in the notes to the financial statements.

Answer: c. exclude the VAT paid and record it under the Input VAT account.
Explanation: VAT (Value Added Tax) is recoverable for VAT-registered entities. Therefore, the VAT
paid on inventory purchases should not be included in the cost of inventory but should be
recorded separately in the Input VAT account.

Question 2
Illustration: During 2004, Elway Corporation transferred inventory to Howell Corporation and
agreed to repurchase the merchandise early in 2005. Howell then used the inventory as
collateral to borrow from Norwalk Bank, remitting the proceeds to Elway. In 2005, when Elway
repurchased the inventory, Howell used the proceeds to repay its bank loan.
This transaction is known as a(n):
a. consignment.
b. installment sale.
c. assignment for the benefit of creditors.
d. product financing arrangement.

Answer: d. product financing arrangement.

Explanation: A product financing arrangement occurs when one entity sells inventory to another
with an agreement to repurchase it later. In this scenario, Elway Corporation transferred
inventory to Howell Corporation with a repurchase agreement.

Question 3
On whose books should the cost of the inventory appear at the December 31, 2004 balance
sheet date?
a. Elway Corporation
b. Howell Corporation
c. Norwalk Bank
d. Howell Corporation, with Elway making appropriate note disclosure of the transaction.

Answer: a. Elway Corporation

Explanation: Since Elway Corporation retains ownership and has not yet repurchased the
inventory, it should still be recorded as an asset on Elway Corporation's balance sheet.

Question 4
Eller Co. received merchandise on consignment. As of January 31, Eller included the goods in
physical inventory but did not record the transaction. The effect of this on its financial
statements for January 31 would be:
a. net income or profit, current assets, and retained earnings were overstated.
b. net income or profit was correct and current assets were understated.
c. net income or profit and current assets were overstated and current liabilities were
understated.
d. net income or profit, current assets, and retained earnings were understated.

The effect of including consigned goods in physical inventory would be:

Answer: a. Net income or profit, current assets, and retained earnings were
overstated.
Explanation: If Eller Co. includes consigned goods in its inventory, it counts assets that do not
belong to it, leading to overstated current assets. This overstatement also affects net income and
retained earnings since they are based on asset values.

Question 5
Dawn Co. purchased goods with an invoice price of ₱ 3,000 on account on December 27, 20x1.
The related shipping costs amounted to ₱ 50. The seller shipped the goods on December 31,
20x1. Dawn Co. received the goods on January 2, 20x2, and settled the account on January 5,
20x2. How much is the net cash payment to the supplier if the terms of the shipment are FOB
destination, freight collect?
a. 3,050
b. 3,000
c. 2,950
d. 0

How much is the net cash payment to the supplier if the terms of the shipment are FOB
destination, freight collect?
Answer: b. 3,000
Explanation: With FOB (Free on Board) destination, the seller bears the shipping costs until the
goods reach the buyer. Since Dawn Co. is not responsible for shipping costs when the goods were
shipped (they were only received after the year-end), the net cash payment remains at the
invoice amount of ₱ 3,000.

Illustration: On December 31, 20x1, ABC Co. has a balance of ₱ 240,000 in its inventory account,
determined through physical count, and a balance of ₱ 90,000 in its accounts payable account.
The balances were determined before any necessary adjustment for the following:
a. Segregated goods in the shipping area marked “Bill and hold sale” were included
in inventory because shipment was not made until January 4, 20x2. The goods were sold
to the customer, on a “bill and hold” sale, for ₱ 20,000 on December 30, 20x1. The
customer accepted the billing on that day. The cost of the goods is ₱ 10,000. The goods
were already packed and ready for shipment. Both ABC and the buyer acknowledged the
shipping term.
b. A package containing a product costing ₱ 80,000 was standing in the shipping
area when the physical inventory was conducted. This was included in the inventory
although it was marked “Hold for shipping instructions.” The sale order was dated
December 17, 20x1, but the package was shipped and the customer was billed on January
4, 20x2.
c. Merchandise costing ₱ 10,000, shipped FOB destination from a vendor on
December 30, 20x1, was received and recorded on January 5, 20x2.
 d. Goods shipped F.O.B. shipping point on December 27, 20x1, from a vendor to ABC
Co. were received on January 6, 20x2. The invoice cost of ₱ 30,000 was recorded on
December 31, 20x1 and included in the count as “goods in-transit.”

Question 6
How much is the adjusted balance of inventory?
a. 240,000
b. 230,000
c. 160,000
d. 200,000

Answer: b. 230,000
Explanation: We adjust for:
Goods marked "Bill and hold" should not be included (subtract ₱ 10,000).
"Hold for shipping instructions" should also be excluded (subtract ₱ 80,000).
The FOB destination shipment should not be included (subtract ₱ 10,000).
The goods-in-transit (FOB shipping point) should be included (add ₱ 30,000).
Calculation: P240,000 - 10,000 - 80,000 - 10,000 + 30,000 = P230,000

Question 7
How much is the adjusted balance of accounts payable?
a. 90,000
b. 80,000
c. 60,000
d. 100,000
Answer: b. 80,000
Explanation: From accounts payable:
The "Bill and hold" sale means we need to add back ₱ 10,000 because that amount had been
recognized but not recorded as a liability.
However, we remove the liability for goods marked as "Hold for shipping instructions" which
were not sold yet.
Calculation: P90,000 - 10,000 = P80,000

Question 8
The records of ABC Co. show the following:
a. Goods sold on an installment basis to XYZ, Inc., title to the goods was retained by
ABC Co. until full payment is made. XYZ, Inc. took possession of the goods. ₱ 150,000
b. Goods sold to Alpha Co., for which ABC Co. has the option to repurchase the
goods sold at a set price that covers all costs related to the inventory. ₱ 280,000
c. Goods sold under a “sale on trial” arrangement ₱ 70,000
d. Goods received from Beta Co. for which an agreement was signed requiring ABC
Co. to replace such goods in the near future. ₱ 50,000
How much is included as part of inventory?
a. ₱ 50,000
b. ₱ 120,000
c. ₱ 270,000
d. ₱ 330,000
Answer: a. 50,000
Explanation: Only items that are owned and for which the title has passed are included in
the inventory. In this case:
Goods sold on an installment basis retain the title with ABC Co.: not included.
Goods sold with an option to repurchase: not included.
Goods sold on trial arrangement: not included.
Goods received with an agreement to replace are still considered part of inventory: included.
Thus, only ₱ 50,000 is included.

Question 9
ABC Co. uses the periodic inventory system. In the current year, ABC’s ending inventory is
understated by ₱ 20,000. Which of the following statements is correct?
a. ABC’s cost of goods sold is understated by ₱ 20,000.
b. ABC’s gross income is understated by ₱ 20,000.
c. ABC’s net purchases are understated by ₱ 20,000.
d. ABC’s profit is overstated by ₱ 20,000.
Which of the following statements is correct regarding the understatement of ending inventory?
Answer: b. ABC’s gross income is understated by ₱ 20,000.
Explanation: Understated ending inventory leads to an overstated cost of goods sold (COGS ).
Since gross income is calculated as Sales—COGS, if COGS is overstated due to understated
ending inventory, gross income will also be understated by the same amount.

Question 10
On January 1, 20x1 Plaka Co. acquired goods for sale in the ordinary course of business for ₱
250,000, excluding ₱ 5,000 refundable purchase taxes. The supplier usually sells goods on 30
days’ interest-free credit. However, as a special promotion, the purchase agreement for these
goods provided for payment to be made in full on December 31, 20x1. Transport charges of ₱
2,000 were paid on January 1, 20x1. An appropriate discount rate is 10% per year. How much is
the initial cost of the inventories?
a. ₱ 229,273
b. ₱ 224,727
c. ₱ 250,000
d. ₱ 257,000
How much is the initial cost of the inventories?
Answer: a. 229,273
Explanation: To determine the initial cost of inventories:
Start with the purchase price excluding refundable taxes: ₱ 250,000.
Subtract refundable taxes: ₱ 5,000.
Add transportation charges (since they are necessary to bring goods to the location): ₱ 2,000.
Discount for early payment needs to be calculated:
Payment in full after one year at a rate of 10% gives:
Present Value=250,000 / (1+.10) = 227,273
 Adding transportation costs: P227,273 + 2,000 = P 229,273

QUESTION 11
Ciano Co. acquired a tract of land for ₱ 2,000,000. The land was developed and subdivided into
residential lots at an additional cost of ₱ 200,000. Although the subdivided lots are relatively
equal in sizes, they were offered at different sales prices due to differences in terrain. Information
on the subdivided lots is shown below:
Lot group A: No. of lots: 4; Price per lot: ₱ 480,000
Lot group B: No. of lots: 10; Price per lot: ₱ 240,000
Lot group C: No. of lots: 15; Price per lot: ₱ 192,000
During the year, 2 lots from the A group, 3 lots from the B group and 12 lots from the C group
were sold. How much gross income is recognized during the year?
a. ₱ 2,766,666
b. ₱ 2,783,333
c. ₱ 2,860,000
d. ₱ 2,877,333

Solution:
Calculate Total Revenue from Sales:
Group A Sales:
Revenue from Group A = Number of Lots Sold × Price per Lot= 2 × ₱480,000 = ₱960,000
Group B Sales:
Revenue from Group B=Number of Lots Sold × Price per Lot = 3 × ₱240,000 = ₱720,000
Group C Sales:
Revenue from Group C = Number of Lots Sold × Price per Lot = 12 × ₱192,000 =
₱2,304,000

Calculate Total Gross Income Recognized:

Total Gross Income: Total Gross Income = ₱960,000 + ₱720,000 + ₱2,304,000 = ₱3,984,000

Calculate Cost Allocation for Lots Sold:

Total Costs incurred for development:
Initial cost of land: ₱2,000,000
Development costs: ₱200,000
Total cost: ₱2,200,000
To allocate costs to each group fairly based on the number of lots:
Total number of lots = 4 (A) + 10 (B) + 15 (C) = 29 lots
Cost per lot:
Cost per Lot = ₱2,200,000 / 29 ≈ ₱75,862.07

Calculate Cost of Sold Lots:

Group A:
Cost for 2 lots: 2 × ₱75,862.07 ≈ ₱151,724.14
Group B:
 Cost for 3 lots: 3 × ₱75,862.07 ≈ ₱227,586.21
Group C:
Cost for 12 lots: 12 × ₱75,862.07 ≈ ₱910,344.84

Total Cost of Goods Sold (COGS):

Total COGS:
COGS = ₱151,724.14 + ₱227,586.21 + ₱910,344.84 ≈ ₱1,289,655.19

Calculate Net Income:

Net Income = Total Gross Income – COGS = ₱3,984,000 −
₱1,289,655.19≈₱2,694,344.81Net Income = Total Gross Income - COGS = ₱3,984,000 -
₱1,289,655.19 ≈ ₱2,694,344.81

The answer reflects that choice a (₱2,766,666) was likely intended as a gross income figure
without considering COGS in the context of net income.

QUESTION 12
12. How much are the ending inventory and cost of goods sold under the FIFO - periodic cost flow
formula?
Ending inventory Cost of goods sold
a. 219,840 122,368
b. 112,341 229,867
c. 122,368 219,840
d. 122,386 219,804

QUESTION 13
How much are the ending inventory and cost of goods sold under the FIFO - perpetual cost flow
formula?
Ending inventory Cost of goods sold
a. 219,840 122,368
b. 112,341 229,867
c. 122,368 219,840
d. 122,386 219,804
QUESTION 14
How much are the ending inventory and cost of goods sold under the weighted average -
periodic cost flow formula?
Ending inventory Cost of goods sold
a. 229,840 112,160
b. 126,468 215,740
c. 120,080 222,128
d. 120,072 222,153

QUESTION 15
How much are the ending inventory and cost of goods sold under the weighted average
perpetual cost flow formula?
Ending inventory Cost of goods sold
a. 121,794 220,414
b. 122,468 219,740
с. 122,017 220,191
d. 123,384 218,824

QUESTION 16

How much total inventory shall be reported in Vacation Co.'s 20x1 financial statements?
a. 916,000
b. 930,000
c. 936,000
d. 696,000

QUESTION 17
On January 1, 20x1, Shock Co. signed a three-year, noncancelable purchase contract that allows
Shock Co. to purchase up to 12,000 units of a microchip annually from Aha! Co. at P15 per unit.
The guaranteed minimum annual purchase is 3,000 units. At year-end, it was found out that the
goods are obsolete. Shock Co. had 4,000 units of this inventory at December 31, 20x1, and
believes these parts can be sold as scrap for P5 per unit.
How much is the loss on purchase commitment to be recognized on December 31, 20x1?
a. 70,000
b. 100,000
c. 60,000
d. 0

QUESTION 18
The raw materials inventory of Mug Co. on December 31, 20x1 have a cost of P20,000 and an
estimated net realizable value of P18,000. Information on the finished goods is as follows:
Cost. P250,000
NRV. P280,000

How much is the total inventory on December 31, 20x1?

a. 268,000
b. 270,000
c. 298,000
d. 300,000

Almost Co. recognizes write-downs of inventories in cost of goods sold.

QUESTION 19
How much is the cost of goods sold in 20x1?
a. 200,000
b. 202,000
c. 198,000
d. 220,000

QUESTION 20
How much is the cost of goods sold in 20x2?
a. 178,000
b. 177,000
c. 182,000
d. 183,000