F1

FINANCIAL ACCOUNTING
THEORY & PRACTICE

INVENTORIES – COST ESTIMATION & BIOLOGICAL ASSETS
QUIZZER
INVENTORY VALUATION
Essay Questions
Inventory Estimation Methods

1. What are the reasons for making an estimate of inventory?
1. Determination of inventory loss due to fire and other  catastrophe or theft of

merchandise.
2. Proof of the reasonable accuracy of a physical count. This is  popularly known as the
"gross profit test."
3. Preparation of interim statements or statements of less than  one year. Interim

statements are usually for a quarter.
However, year-end statements require physical count, not a mere estimate of inventory value.
Gross profit method

2. Explain the gross profit method of estimating the cost of ending inventory.
Under the gross profit method, the ending inventory is computed as "goods available for sale
minus cost of sales".
The cost of sales is determined through the use of the gross profit rate and this is the reason
the gross profit method is called as such.
This method is based on the major assumption that the rate of gross profit remains
approximately the same from period to period and therefore the ratio of cost of goods sold to
net sales is relatively constant from period to period.
Retail inventory method

3. Explain the retail method of estimating the cost of ending inventory.
The retail inventory method came to its name because the selling price or retail price is tagged
to each item and therefore the ending inventory is stated at selling price.
The ending inventory is computed as follows:
Goods available for sale at selling price minus net sales equals ending inventory at selling
Essay Questions: Inventory – Cost Estimation Page 4

Inventory – Cost Estimation
price which is multiplied by the cost ratio to get the inventory at cost.
The cost ratio under the retail method is computed by dividing the goods available for sale at
cost by the goods available for sale at selling price.
4. What are the four applications of the retail inventory method?
1. Conservative approach - The cost ratio is determined by including markups and

excluding markdowns in computing the goods available for sale at retail. This approach
is also known as the conventional or lower of average cost or market approach.
2. Average cost approach - The markups and markdowns are  both included in the
computation of the cost ratio.
3. FIFO approach - A cost ratio is computed for the current  year. Thus, only the current
purchases are considered  together with markups and markdowns. The beginning
 inventory is excluded in the computation.
4. LIFO approach - The cost ratio is computed following the  same procedure under FIFO
approach. Thus, the FIFO and  LIFO would have the same cost ratio for the current year.
5. Which approach is followed in measuring inventory under the retail inventory method?
PAS 2, paragraph 22, provides that the percentage used under the retail method shall take
into consideration inventory that has been marked down to below its original selling price.
An average percentage for each retail department is often used.
This means that the average cost approach shall be applied in conjunction with the retail
inventory method.
Of course, PAS 2 requires either the FIFO or average method as a cost formula.
6. Define the following:
1. Original retail
2. Initial markup
3. Additional markup
4. Markup cancelation
Essay Questions: Inventory – Cost Estimation Page 5

5. Net markup
6. Markdown
7. Markdown cancelation
8. Net markdown
1. Original retail - is the sales price at which the goods are first offered for sale.
2. Initial markup - the original markup on the cost of goods or the amount added to the
original cost to get the original retail price.
3. Additional markup - is an increase in the sales price above the original sales price or the
amount added to the original retail price.
4. Markup cancelation - is a decrease in the sales price that does not reduce the sales price
below the original sales price.
5. Net markup - additional markup minus markup cancelation.
6. Markdown - is a decrease in the sales price below the original price.
7. Markdown cancelation - is an increase in sales price that does not raise the sales price
above the original sales price.
8. Net markdown - markdown minus markdown cancelation.
BIOLOGICAL ASSETS
Essay Questions
1. What is the scope of PAS 41 on "agriculture"?
PAS 41 shall be applied to account for the following when they relate to agricultural activity:
a. Biological assets
b. Agricultural produce
c. Government grant related to a biological asset
Note that PAS 41 is applied to agricultural produce at the point of harvest. Thereafter, PAS 2
on inventories shall be applied. PAS 41 does not deal with the processing of agricultural
produce after harvest. For example, the processing of grapes into wine is covered by PAS
2.
2. Define biological assets, agricultural produce and harvest.
Biological assets are "living animals and living plants".
Agricultural produce is the harvested product of the entity's biological assets.
Essay Questions: Biological Assets Page 6

Biological Assets
Harvest is the detachment of produce from a biological asset or the cessation of a biological
asset's life processes.
3. Give examples of biological assets, agricultural produce and products that are the result of
processing after harvest.
The following table provides examples of biological assets, agricultural produce and products
that are the result of processing after harvest.
Biological asset Agricultural Product

produce after harvest
1. Sheep Wool Yarn, carpet
2. Trees in plantation forest Felled trees Logs, lumber
3. Plant Harvested cane Sugar
4. Dairy cattle Milk Cheese
5. Pigs Carcass Sausage, cured ham
6. Bushes Leaf Tea, cured tobacco
7. Vines Grapes Wine
8. Fruit trees Picked fruit Processed fruit
Again, the measurement of biological assets and agricultural produce is covered by PAS 41
and the measurement of products after harvest is covered by PAS 2 on inventories.
4. Define agricultural activity and biological transformation.
Agricultural activity or simply "agriculture" is the management by an entity of the biological

transformation and harvest of biological assets for sale or for conversion into agricultural
produce or into additional biological assets.
Biological transformation comprises the processes of growth, degeneration, production and

procreation that cause qualitative or quantitative changes in a biological asset.
5. Give examples of agricultural activity.
Agricultural activity covers a diverse range of activities such as the following:

1. Raising livestock
2. Annual or perennial cropping
3. Cultivating orchards and plantations
4. Floriculture

5. Aquaculture, including fish farming
6. What are the common features of agricultural activity?
The common features of agricultural activity are as follows:

a. Capability to change
b. Management of change
c. Measurement of change
Capability to change
Living animals and plants are capable of biological transformation.
Management of change
The agricultural activity must be "managed" to facilitate biological transformation by
enhancing or at least stabilizing conditions necessary for the process to take place.
Such management distinguishes agricultural activity from other activities.
For example, harvesting from "unmanaged" sources, such as ocean fishing and
deforestation, is not agricultural activity.
Measurement of change
The change in quality or quantity brought about by biological transformation or harvest is
measured and monitored as a routine management function.
7. Give examples of biological transformation.

Biological transformation results from the following types of outcome:
1. Asset changes through:
a. Growth - an increase in quantity or improvement in  quality of an animal or plant.
b. Degeneration - a decrease in quantity or deterioration  in quality of an animal or
plant.
c. Procreation - creation of additional living animal or  plant.
2. Production of agricultural produce such as latex, tea leaf,  wool and milk.
8. What are the conditions for the recognition of a biological asset or agricultural produce?
An entity shall recognize a biological asset or an agricultural produce when:
1. The entity controls the asset as a result of past event.
2. It is probable that future economic benefits associated  with the asset will flow to the
entity.

Biological Assets
3. The fair value or cost of the asset can be measured  reliably.
9. Explain the measurement of biological asset and agricultural produce.
A biological asset shall be measured on initial recognition and at the end of each reporting
period at fair value less cost of disposal.
Agricultural produce shall be measured at fair value less cost of disposal at the point of
harvest.
10. What is the meaning of "cost of disposal"?
"Cost of disposal" is the incremental cost directly attributable to the disposal of an asset.
In other words, cost of disposal is a necessary cost for a sale to occur that would not
otherwise arise.
Examples include commission to brokers and dealers, levy by regulatory agency and
commodity exchanges, and transfer tax and duty.
Under the Basis for Conclusions on PAS 41, cost of disposal specifically excludes transport
cost, finance cost and income tax.
11. Explain the fair value measurement of biological asset.
There is a presumption that fair value can be measured reliably for a biological asset.
However, this presumption can be rebutted only on initial recognition for a biological asset
for which market-determined prices are not available or estimates of fair value are determined
to be clearly unreliable.
In such a case, the biological asset shall be measured at cost less accumulated depreciation
and any accumulated impairment loss.
However, once the fair value of such biological asset becomes clearly measurable, the entity
shall measure the biological asset at fair value less cost of disposal.
12. Explain the fair value measurement of agricultural produce.

In all cases, an entity shall measure agricultural produce at the point of harvest at fair value
less cost of disposal.

The prevailing view is that the fair value of agricultural produce at the point of harvest can
always be measured reliably.
The fair value measurement of agricultural produce stops at the time of harvest. After that
date, PAS 2 on inventory shall apply.
In other words, the harvested product becomes an inventory and shall be measured
subsequently at the lower of cost and net realizable value.
The harvested product is recorded by debiting inventory and crediting gain from change in
fair value.
13. Fair value is the price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date.
PFRS 13, paragraph 72, enumerates the fair value hierarchy or best evidence of fair value
as follows:
1. Level 1 inputs are the quoted prices in an active market for identical assets. An active
market is a market in which transactions for the asset or liability take place with sufficient
regularity and volume to provide pricing information on an ongoing basis. A principal
market is the market with the greatest volume and level of activity for the asset or liability.
2. Level 2 inputs are observable inputs either directly or  indirectly. Level 2 inputs include
quoted prices for similar assets in an active market and quoted prices for identical or
similar assets in an inactive market.
3. Level 3 inputs are unobservable inputs for the asset  usually developed by the entity
using the best available  information from the entity's own data.
An example is the financial forecast of expected cash inflows from the asset.
14. Explain the treatment of gain or loss from the fair value measurement of biological asset and
agricultural produce.
A gain or loss arising on initial recognition of a biological asset at fair value less cost of
disposal and any subsequent changes in fair value cost of disposal shall be included in profit
or loss.
A loss may arise on initial recognition of a biological asset because cost of disposal is
deducted in determining fair value loss cost of disposal of a biological asset.
A gain may arise on initial recognition of a biological asset, for example, when a calf is born.
A gain or loss arising from initial recognition of agricultural produce at fair value less cost of
disposal shall also be included in profit or loss.

Biological Assets
A gain or loss may arise on initial recognition of agricultural produce as a result of harvesting.
An entity shall disclose the aggregate gain or loss arising on the initial recognition of biological
asset and agricultural produce and from the change in fair value less cost of disposal of
biological asset.
15. Is agricultural land a biological asset?

Agricultural land is not a biological asset.
The principles espoused in PAS 41 for biological assets and agricultural produce do not apply
to agricultural land.
The requirements of PAS 16 which are applicable to property, plant and equipment apply
equally to agricultural land for purposes of measurement.
16. Explain the fair value measurement of biological assets physically attached to land.
Biological assets are often physically attached to land, for example, trees in a plantation
forest.
There may be no separate market for biological assets that are attached to the land but an
active market may exist for the combined assets, that is, for the biological assets and land as
a package.
An entity may use information regarding the combined assets to determine the fair value of
the biological assets.
For example, the fair value of the land may be deducted from the fair value of the combined
assets to arrive at the fair value of the trees in the plantation forest.
17. Explain the treatment of a government grant related to:
1. Biological asset measured at fair value less cost of  disposal.
2. Biological asset measured at cost less any accumulated  depreciation and any
accumulated impairment losses.
1. An unconditional government grant related to a biological asset that has been measured
at fair value less cost of disposal shall be recognized in profit or loss when the grant

becomes receivable. If a government grant related to a biological asset measured at fan

value less cost of disposal is conditional, the grant shall be recognized in profit or loss
only when the conditions attaching to the grant are met.
2. If a government grant relates to a biological asset  measured at cost less any

accumulated depreciation and  any accumulated impairment losses, PAS 20 on
"government  grant" is applied.

MCQ – Theory: Inventories – Cost Estimation

Gross profit method
1. The gross profit method assumes that
A. The amount of gross profit is the same as in prior years.
B. Inventory values have not increased from previous  years.
C. Sales and cost of goods sold have not changed from  previous years. FA © 2014
D. The relationship between selling price and cost of goods  sold is similar to prior years.
2. Which of the following is not a basic assumption of the gross profit method?
A. Goods not sold must be hand.
B. The beginning inventory plus purchases equal total goods to be accounted for.
C. The amount of purchases and the amount of sales remain relatively unchanged from the
comparable previous period.
D. The sales reduced to cost basis when deducted from the sum of beginning inventory and
purchases would result to inventory on hand. FA © 2014
3. How is the gross profit method used in relation to inventory valuation?

A. To provide a FIFO inventory value
B. To estimate the cost of goods sold
C. To verify the accuracy of the physical inventory
D. To verify the accuracy of the perpetual inventory record FA © 2014
4. The gross margin method of estimating ending inventory  may be used for all of the following,
except
A. Internal as well as external interim reports
B. Internal as well as external year-end reports
C. Estimate of inventory destroyed by fire or other casualty
D. Rough test of the validity of an inventory cost  determined under either periodic or
perpetual system. FA © 2014
5. Which would not require an estimate of inventory?

A. Inventory destroyed by typhoon
B. Interim financial statements are prepared
C. Proof of the reasonable accuracy of the physical count
D. Determination of the ending inventory to be reported  in the statement of financial
position at year-end FA © 2014
MCQ – Theories: Inventory – Cost Estimation Page 13

6. The gross profit method of estimating inventory would not be useful when
A. There is a significant change in the mix of products being  sold.
B. The relationship between gross profit and sales remains  stable over time.
C. A periodic system is in use and inventories are required  for interim statements.
D. Inventories have been destroyed or lost by fire, theft or  other casualty, and the specific
data required for  inventory valuation are not available. FA © 2014
7. The gross profit method of inventory valuation is not valid when

A. All ending inventory is destroyed by fire before it can  be counted.
B. The gross margin percentage changes significantly  during the year.
C. There is substantial increase in the cost of inventory  during the year.
D. There is substantial increase in the quantity of inventory  during the year. FA © 2014
8. The gross profit method of inventory valuation is invalid when

A. A portion of inventory is destroyed.
B. There is a substantial increase in inventory during the year.
C. There is no beginning inventory because it is the first year of operation.
D. The gross profit percentage applicable to the goods in ending inventory is different from
the percentage applicable to goods sold during the period. FA © 2014
9. If the gross profit rate is based on sales, the cost of goods sold is computed as
A. Gross sales divided by sales ratio C. Net sales divided by sales ratio
B. Gross sales times cost ratio D. Net sales times cost ratio TOA © 2013
10. If the gross profit rate is based on cost, the cost of goods sold is computed as
A. Gross sales divided by sales ratio C. Net sales divided by sales ratio
B. Gross sales times cost ratio D. Net sales times cost ratio FA © 2014
11. Which statement is not valid about the gross profit method?
A. It may be used by auditors.
B. It is an acceptable accounting procedure.
C. It may be used to estimate inventory for annual  statements.
D. It may be used to estimate inventory for interim  statements. FA © 2014
Retail inventory method

12. The retail method is based on the assumption that
A. Ratio of cost to retail changes at a constant rate.
B. Ratio of gross margin to sales is approximately the same  each period.
C. Proportions of markup and markdown to selling price  are the same.

D. Final inventory and the total of goods available for sale  contain the same proportion of
high cost and low cost  ratio goods. FA © 2014
13 A major advantage of the retail inventory method is that it

A. Hides costs from customers and employees.
B. Permits entities to avoid taking an annual physical  inventory.
C. Gives a more accurate measurement of inventory than  other methods.
D. Provides a method for inventory control and facilitates  determination of the periodic
inventory. FA © 2014
14. Which of the following is not a reason why the retail  inventory method is used widely?
A. For insurance information
B. To defer income tax liability
C. As a control measure in determining inventory shortage FA © 2014
D. To permit the computation of net income without a  physical count of inventory
15. Which of the following is not required when using the retail inventory method?
A. Total sales for the period.
B. A record of the total cost and retail value of goods purchased for the period. FA © 2014
C. All inventory items must be categorized according to the retail markup percentage.
D. A record of the total cost and retail value of the goods available for sale for the period.
16. What condition is not necessary when using the retail inventory method?
A. A record of sales for the period
B. A record of total cost of goods sold for the period
C. A record of total cost and retail value of goods purchased for the period FA © 2014
D. A record of total cost and retail value of goods available for sale for the period
17. The retail inventory method would include which of the following in the calculation of the
goods available for sale at both cost and retail?
A. Freight in C. Markups
B. Markdowns D. Purchase returns FA © 2014
Average retail inventory method

18. If the average retail inventory method is used, which of the following calculations would
include or exclude net markdowns?
TOA © 2013 A. B. C. D.
Cost ratio Include Include Exclude Exclude
Ending inventory at retail Include Exclude Include Exclude

Conventional retail inventory method

19. An inventory method which is designed to approximate inventory valuation at the lower of
cost and net realizable value is
A. Average retail method C. FIFO retail
B. Conventional retail method D. LIFO retail FA © 2014
20. The conventional retail method produces an ending inventory that approximates
A. Lower of cost or net realizable value
B. Lower of LIFO cost or net realizable value
C. Lower of FIFO cost or net realizable value
D. Lower of average cost or net realizable value FA © 2014
21. To produce an inventory valuation which approximates the lower of cost or net realizable
value using the retail inventory method, the computation of the ratio of cost to retail should
FA © 2014
A. Include markups and markdowns C. Include markups but not markdowns
B. Include markdowns but not markups D. Ignore both markups and markdowns
22. If the conservative retail inventory method is used, which of the following calculations would
include or exclude net markdowns?
FA © 2014 A. B. C. D.
Cost ratio Include Include Exclude Exclude
Ending inventory at retail Include Exclude Include Exclude
23. When the conventional retail inventory method is used, markdowns are commonly ignored in
the computation of cost to retail ratio because
A. There may be no markdowns in a given year.
B. This tends to give a better approximation of the lower  of cost or net realizable value.
C. Markups are also ignored.
D. This tends to result in the showing of a normal profit  margin in a period when no
markdown goods have  been sold. FA © 2014
Sensitivity analysis
24. Which of the following would cause a decrease in the cost ratio used in the retail inventory
method?
A. Higher freight in charges C. Lower net markups
B. Higher retail prices D. More employee discounts FA © 2014

Biological Assets
25. What is the effect of freight in on the cost-retail ratio when using the conservative retail
method?
A. Increases the cost-retail ratio
B. Decreases the cost-retail ratio
C. No effect on the cost-retail ratio
D. Depends on the amount of the net markup FA © 2014
26. What is the effect of net markup on the cost-retail ratio when using the conservative retail
method?
A. Increases the cost-retail ratio
B. Decreases the cost-retail ratio
C. No effect on the cost-retail ratio
D. Depends on the amount of the net markdown FA © 2014
Comprehensive
27. With regard to the retail inventory method, which of the following is the most accurate
statement?
A. It is not adaptable to FIFO costing.
B. Generally, accountants ignore net markups and net  markdowns in computing the cost
price percentage.
C. Generally, accountants exclude net markups and  include net markdowns in computing
cost price  percentage.
D. This method results in a lower ending inventory cost if  net markups are included but net
markdowns are  excluded in computing the cost price percentage. FA © 2014
MCQ – Theory: Biological Assets

Scope
28. Where there is a long aging or maturation process after harvest, the accounting for such
products shall be dealt with by
A. PAS 41, Agriculture C. PAS 40, Investment property FA © 2014
B. PAS 2, Inventories D. PAS 16, Property, plant and equipment
29. Which of the following is not dealt with by PAS 41?

A. The accounting for biological assets.
B. The processing of agricultural produce after harvesting. FA © 2014
C. The accounting treatment of government grant received  in respect of biological assets.
D. The initial measurement of agricultural produce  harvested from the entity's biological
assets.
MCQ – Theories: Biological Assets Page 17

Basic concept
30. It is the management by an entity of the biological transformation and harvest of biological
assets for sale or for conversion into agricultural produce or into additional biological asset.
A. Agricultural activity C. Development activity
B. Biological activity D. Economic activity FA © 2014
31. Agricultural activity includes all of the following, except

A. Aquaculture C. Perennial cropping
B. Ocean fishing D. Raising livestock FA © 2014
32. Agricultural activity results in which of the following type of asset?

A. Biological asset
B. Agricultural produce
C. Both biological asset and agricultural produce
D. Neither biological asset nor agricultural produce FA © 2014
33. It is a market in which transactions for the asset or liability take place with sufficient regularity
and volume to provide pricing information on an ongoing basis.
A. Active market C. Global market
B. Financial market D. Principal market FA © 2014
Land
34. Land that is related to agricultural activity is measured
A. At fair value. FA © 2014
B. At fair value in combination with the biological asset  that is being grown on the land.
C. At the resale value separate from the biological asset that is being grown on the land.
D. In accordance with PAS 16, Property, Plant and Equipment, or PAS 40, Investment
Property.
Biological asset & agricultural produce

35. What is the measurement basis for biological asset and agricultural produce?
A. Current cost C. Historical cost
B. Fair value D. Present value FA © 2014
Biological assets
36. Biological assets are TOA © 2013
A. Living animals only C. Both living animals and living plants
B. Living plants only D. Neither living animals nor living plants

Biological Assets
37. Biological assets

A. Must be measured at cost.
B. Are found only in Biotech entities.
C. Do not generally have future economic benefits.
D. Are living animals or living plants and must disclosed as a separate line item in the
statement of financial position. FA © 2014
38. All of the following would be classified as biological asset, except

A. Chicken C Egg
B. Dairy cattle D. Tree FA © 2014
39. Biological transformation results from asset changes through all of the following, except
A. Degeneration C. Procreation FA © 2014
B. Growth D. Production of agricultural produce
40. Which of the following criteria must not be satisfied before a biological asset can be
recognized in the financial statements?
A. An active market for the asset exists.
B. The entity controls the asset as a result of past event.
C. The fair value or cost of the asset can be measured reliably. FA © 2014
D. It is probable that future economic benefits relating  to the asset will flow to the entity.
41. Generally speaking, biological assets relating to agricultural activity shall be measured using
A. Historical cost
B. Net realizable value
C. A fair value approach
D. Historical cost less depreciation less impairment FA © 2014
42. Biological assets are measured at

A. Cost C. Lower of cost and net realizable value
B. Fair value less cost of disposal D. Net realizable value FA © 2014
43. Which of the following is unlikely to be used in fair value measurement?

A. External independent valuation
B. Quoted price of a similar asset in an active market
C. Quoted price of an identical asset in an active market
D. Quoted price of an identical asset in an inactive market FA © 2014

44. When the fair value of the biological asset cannot be determined reliably, the biological asset
shall be measured at
A. Cost
C. Cost less accumulated depreciation
D. Cost less accumulated depreciation and accumulated impairment losses FA © 2014
Income from biological asset

45. An entity had a plantation forest that is likely to be harvested and sold in 30 years. The income
shall be accounted for in which of the following?
A. No income shall reported annually until first harvest  and sale in 30 years.
B. The eventual sale proceeds shall be estimated and matched to the profit and loss
account over the 30-year  period.
C. Income shall be measured annually and reported using  a fair value approach that
recognizes and measures  biological growth.
D. The plantation forest shall be valued every 5 years and  the increase in value shall be
recognized as component  of other comprehensive income. FA © 2014
46. A gain or loss arising on the initial recognition of a biological asset and from a change in the
fair value less cost of disposal of a biological asset shall be included in
A. A capital reserve within equity C. Other comprehensive income FA © 2014
B. A separate revaluation reserve D. The profit or loss for the period
47. An entity owns a herd of cattle. Where should changes in the fair value of a herd of cattle be
recognized in the financial statements?
A. In profit or loss only
B. In the statement of cash flows only
C. In other comprehensive income only
D. In profit or loss or other comprehensive income FA © 2014
Agricultural produce
48. It is the harvested product of the entity's biological assets.
A. Agricultural produce C. Harvest
B. Agriculture D. Product TOA © 2013
49. Agricultural produce is
A. The harvested product from biological asset.
B. Valued at the time of harvest at the cost of production.
C. All of the choices are correct regarding agricultural produce.
D. Valued at each reporting period at fair value less cost of disposal. FA © 2014

Biological Assets
50. Which of the following would be classified as agricultural  produce?

A. Apple C. Butter
B. Bush D. Lumber FA © 2014
51. Agricultural produce is measured at

A. Fair value
C. Net realizable value less normal profit margin
D. Fair value less cost of disposal at the point of harvest FA © 2014
52. When agricultural produce is harvested, the harvest shall be accounted for by using PAS 2,
Inventories, or another applicable PFRS. For the purpose of that standard, cost at the date
of harvest is deemed to be
A. Market value
B. The historical cost of the harvest
C. The historical cost less accumulated impairment losses
D. The fair value less cost of disposal at the point of harvest FA © 2014
53. Which of the following costs should not be included in cost  of disposal?
A. Commission to broker C. Transfer tax and duty
B. Levy by regulatory agency D. Transport cost FA © 2014
54. Which of the following statements is true regarding agricultural produce?

A. The fair value measurement of agricultural produce stops at the time of harvest.
B. In all cases, an entity shall measure agricultural produce at fair value less cost of disposal
at the point of harvest.
C. The prevailing view is that the fair value of agricultural produce at the point of harvest
can always be measured reliably.
D. All of these statements are true regarding agricultural produce. FA © 2014
55. Which of following statements in relation to agricultural produce is correct?

I. In all cases, an entity shall measure agricultural  produce at the point of harvest at fair
value less cost  of disposal.
II. The prevailing view is that the fair value of  agricultural produce at the point of harvest
can always  be measured reliably.
A. I only C. Both I and II
B. II only D. Neither I nor II TOA © 2013

Processed product
56. Which of the following would be classified as a product that is the result of processing after
harvest?
A. Bananas C. Cotton
B. Cheese D. Wool FA © 2014
Government grant
57. An unconditional government grant related to a biological asset that has been measured at
fair value less cost of disposal shall be recognized as
A. Income when the grant becomes receivable.
B. A deferred credit when the grant has been approved.
C. A deferred credit when the grant becomes receivable.
D. Income when the grant application has been submitted. FA © 2014
58. If a government grant related to a biological asset is conditional on certain events, the grant
shall be recognized as
A. Income when the grant has been approved.
B. A deferred credit when the grant is approved.
C. Income when the conditions attaching to the grant are  met. FA © 2014
D. A deferred credit when the conditions attached to the  government grant are met.
Presentation & disclosure requirements

59. Which of the following information shall be disclosed in relation to biological asset and
agricultural produce?
A. There is no requirement in the standard to disclose  separately any gain or loss.
B. Separate disclosure of the gain or loss relating to  biological asset and agricultural
produce.
C. The total gain or loss from biological asset, agricultural  produce, and from changes in
fair value less cost of  disposal of biological asset.
D. The aggregate gain or loss arising on the initial  recognition of biological asset and
agricultural produce  and from the change in fair value less cost of disposal of  biological
asset. TOA © 2013
60. Where there is a production cycle of more than one year for a biological asset, PAS 41
encourages separate disclosure of
A. Price change only C. Total change in value FA © 2014
B. Physical change only D. Physical change and price change

MCQ – Problems: Inventory – Cost Estimation

Gross Profit Method
Sales
1. Nefarious Company reported net income of P480,000 for current year. Percentage
distribution of some of the items in the income statement was as follows:
Selling expense 10% of sales
Administrative expenses, excluding bad debts 15% of sales
Bad debts expense 3% of sales
It is ascertained that administrative expenses are 25% of cost of sales. What is the amount
of sales for the current year?
A. 1,920,000 C. 4,000,000
B. 3,200,000 D. 4,800,000 FA © 2014
Gross profit
2. Beyonce Company sells merchandise on a consignment basis to dealers. The selling price
of the merchandise averages 25% above cost. The dealer is paid a 10% commission of the
sales price for all sales made. All dealer sales are made on a cash basis. The following
consignment activities occurred during the current year:
Manufacturing cost of goods shipped on consignment 8,800,000
Sales price of merchandise sold by dealers 9,600,000
Payments remitted by dealers after deducting commission 6,300,000
What is the gross profit on sales?
A. 1,220,000 C. 1,920,000
B. 1,700,000 D. 2,400,000 PA 1 © 2014
Ending inventory
3. Keepsake Company estimated the cost of the physical inventory on March 31 for use in
interim financial statement. The rate of markup on cost is 25%o. The inventory on January 1
was P5,500,000. During the period January 1 to March 31, the entity had purchases of
P4,300,000, purchase returns of P200,000 and sales of P7,500,000. What is the estimated
cost of inventory on March 31?
A. 2,100,000 C. 3,600,000
B. 2,800,000 D. 3,975,000 PA 1 © 2014
4. Keepsake Company estimated the cost of its physical inventory on March 31 for use in interim
financial statement. The rate of markup on cost is 25%. The inventory on January 1 was
P5,500,000. During the period January 1 to March 31, the entity had purchases of
P4,300,000, purchase returns of P200,000 and sales of P7,500,000. What is the estimated
cost of inventory on March 31?
MCQ – Problems: Inventory – Cost Estimation Page 23

A. 2,100,000 C. 3,600,000
B. 2,800,000 D. 3,975,000 FA © 2014
5. Avarice Company has a recent gross profit history of 40% of net sales. The following data
are available from the accounting records for the three months ended March 31, 2014:
Inventory - January 1 650,000
Purchases 3,200,000
Net sales 4,500,000
Purchase return 75,000
Freight in , 50,000
Using the gross profit method, what is the estimated cost of inventory on March 31, 2014?
A. 1,120,000 C. 2,025,000
B. 1,125,000 D. 2,700,000 FA © 2014
Partial loss of inventory

6. A fire destroyed Newborn Company's inventory on October 31. On January 1, the inventory
had a cost of P2,500,000. During the period January 1 to October 31, the entity had net
purchases of P7,500,000 and net sales of P15,000,000. Undamaged inventory at the date
of fire had a cost of PI 50,000. The markup on cost is 66 2/3%. What was the cost of inventory
destroyed by fire?
A. 850,000 C. 3,850,000
B. 1,000,000 D. 4,000,000 FA © 2014
7. On June 30, 2014, a flash flood caused damage to the merchandise stored in the warehouse
of Teachable Company.
* Net sales for 2013 were P800,000 costing P560,000.
* Inventory, January 1 was P200,000, 90% of which was in the warehouse and 10% in
downtown showroom.
* From January 1 to date of flood, the invoice value of purchases all stored in the
warehouse is P100,000, freight P4,000, and purchase return P6,000.
* Cost of merchandise transferred from the warehouse to showroom was P8,000 and net
sales from January 1 to June 30, 2014 (all warehouse stock) amounted P320,000.
What is the estimated cost of merchandise destroyed by flood?
A. 46,000 C. 66,000
B. 50,000 D. 80,000 FA © 2014
8. In December 2014, Unanimous Company had a significant portion of inventory stolen. The
entity determined the cost of inventory not stolen to be P100,000.

2014 2013
Purchases 5,200,000 5,000,000
Purchase return and allowance 240,000 200,000
Sales 7,880,000 8,200,000
Sales return and allowance 80,000 200,000
Beginning inventory 1,200,000 2,000,000
What is the estimated cost of the stolen inventory?
A. 144,000 C. 644,000
B. 600,000 D. 700,000 FA © 2014
9. On December 31, 2014, Frenzy Company had a fire which completely destroyed the goods
in process inventory. A physical inventory was taken after the fire.
December 31 January 1
Finished goods 1,000,000 1,400,000
Goods in process 0 1,000,000
Raw materials 600,000 300,000
Supplies 100,000 400,000
During the year, the entity reported sales of P3,000,000, purchases of P1,000,000, freight of
P100,000, direct labor of P800,000 and manufacturing overhead at 50% of direct labor. The
average gross profit rate is 30% on sales. What is the estimated cost of the goods in process
on December 31, 2014 that were completely destroyed by fire?
A. 1,300,000 C. 2,000,000
B. 1,700,000 D. 2,100,000 FA © 2014
10. On December 31, 2014, a big fire caused severe damage to the warehouse of Kleptomaniac
Company.
2014 2013
Merchandise inventory, beginning 1,000,000 -
Purchases 8,000,000 5,600,000
Purchase return 500,000 100,000
Sales 9,000,000 6,000,000
At the beginning of 2014, the entity changed the policy on the sellIng prices of the
merchandise in order to produce a gross profit rate of 5% higher than the gross profit rate in
2013. Undamaged merchandise marked to sell at P500,000 was salvaged. Damaged
merchandise marked to sell at P100,000 had an estimated realizable value of P10,000. What
amount should be reported as inventory fire loss?
A. 1,600,000 C. 1,840,000
B. 1,780,000 D. 2,200,000 FA © 2014

11. On the night of September 30, 2014, a fire destroyed most of the merchandise inventory of
Sonia Company. All goods were completely destroyed except for partial damaged goods that
normally sell for P100,000 and that had an estimated net realizable value of P25,000 and
undamaged goods that normally sell for P60,000. The following data are available:
Inventory, January 1 660,000
Net purchases, January 1 through September 30 4,240,000
Net sales, January 1 through September 30 5,600,000
Total 2013 2012 2011
Net sales 9,000,000 5,000,000 3,000,000 1,000,000
Cost of sales 6,750,000 3,840,000 2,200,000 710,000
Gross income 2,250,000 1,160,000 800,000 290,000
What is the estimated amount of fire loss on September 30,2014?
A. 580,000 C. 630,000
B. 615,000 D. 700,000 FA © 2014
12. Cool Air Company lost 50% of its inventory by fire on December 31, 2014. No inventory had
been taken on December 31, 2014. The
following profit and loss data are available:
2014 2013 2012
Inventory, January 1 1,040,000 840,000 848,000
Purchases 3,600,000 2,876,000 2,836,000
Purchase returns 240,000 140,000 200,000
Sales 4,060,000 3,900,000 3,620,000
Sales returns 60,000 100,000 20,000
What is the value of the inventory destroyed by fire?
A. 800,000 C. 1,600,000
B. 880,000 D. 1,760,000 PA 1 © 2014
13. Ombudsman Company lost all inventory by fire on December 31, 2014.
2014 2013 2012
Inventory - January 1 1,040,000 1,410,000 850,000
Net purchases 4,360,000 2,730,000 2,640,000
Net sales 5,000,000 4,000,000 3,400,000
Goods with selling price of P300,000 are sent on consignment. These goods are still unsold
by the consignee on December 31, 2014. Goods purchased costing P190.000 are in transit
on December 31, 2014. The goods were shipped FOB shipping point on December 28, 2014
and properly recorded as purchases. What amount of inventory fire loss should be reported?
A. 1,410,000 C. 1,900,000
B. 1,500,000 D. 1,690,000 FA © 2014

Total loss of inventory

14. On June 30, a fire destroyed Intense Company's entire inventory. The inventory on January
1 totaled P6,600,000. From January 1 through the time of the fire, the entity made purchases
of P3,000,000, incurred freight in of P300,000, and had sales of P7,800,000. The rate of
gross profit on selling price is 30%. What is the approximate cost of the inventory that was
destroyed?
A. 3,600,000 C. 4,140,000
B. 3,900,000 D. 4,440,000 FA © 2014
15. Lin Company sells merchandise at a gross profit of 30%. On June 30,2014, all of the inventory
was destroyed by fire. The following figures pertain to the operations for the six months ended
June 30, 2014:
Net sales 8,000,000
Beginning inventory 2,000,000
Net purchases 5,200,000
What is the estimated cost of the destroyed inventory?
A. 800,000 C. 2,800,000
B. 1,600,000 D. 4,800,000 PA 1 © 2014
16. On December 31, 2014, a storm surge damaged the warehouse of Braveheart Company.
The entire inventory and many accounting records were completely destroyed.
January 1 December 31
Inventory 1,500,000
Purchases 5,500,000
Cash sales 900,000
Collections of accounts receivable 8,400,000
Accounts receivable 700,000 1,100,000
Gross profit rate on sales 40%
What is the inventory loss from the storm surge?
A. 1,180,000 C. 2,260,000
B. 1,720,000 D. 2,700,000 FA © 2014
Missing inventory
17. Boon Company provided the following information for the current year:
Beginning inventory 500,000
Purchases 2,500,000
Sales 3,200,000
A physical inventory taken at year-end resulted in an ending inventory of P500,000. The gross
profit on sales has remained constant at 25% in recent years. The entity suspects some

inventory may have been taken by a new employee. What is the estimated cost of missing
inventory at year-end?
A. 0 C. 440,000
B. 100,000 D. 600,000 FA © 2014
18. Olivia Company provided the following information for the year ended December 31,2014:
Purchases 2,300,000
Purchase returns 80,000
Freight in 60,000
Sales 3,400,000
Sales discounts 20,000
Sales returns 30,000
On December 31, 2014, a physical inventory revealed that the ending inventory was only
P420,000. The gross profit on sales has remained constant at 30% in recent years. The
entity suspects that some inventory may have been pilfered by one of the entity's employees.
On December 31,2014, what is the estimated cost of missing inventory?
A. 151,000 C. 420,000
B. 165,000 D. 585,000 PA 1 © 2014
19. Celibacy Company provided the following information for the year ended December 31, 2014:
Purchases 2,300,000
Freight in 60,000
Sales 3,400,000
On December 31, 2014, a physical inventory revealed that the ending inventory was only
P420,000. The gross profit on sales has remained, constant at 30% in recent years. The
entity suspects that some inventory may have been pilfered by one of the entity's employees.
On December 31, 2014, what is the estimated cost of missing inventory?
A. 151,000 C. 420,000
B. 165,000 D. 585,000 FA © 2014
Cost of goods sold

20. On September 30, 2014, a fire at Elusive Company's only warehouse caused severe
damaged to the entire inventory. Based on recent history, the entity has a gross profit of 30%
on cost of sales. The following information is available from the records for the nine months

ended September 30, 2014:

Purchases 3,000,000
Net sales 3,640,000
A physical inventory disclosed usable damaged goods which can be sold to a jobber for
P50,000. What is the estimated cost of goods sold for the nine months ended September 30,
2014?
A. 2,485,000 C. 2,750,000
B. 2,548,000 D. 2,800,000 FA © 2014
21. On September 30,2014, Brock Company reported that a fire caused severe damage to the
entire inventory. The entity has a gross profit of 30%o on cost. The following data are
available for nine months ended September 30,2014:
Inventory at January 1 1,100,000
Net sales 7,280,000
A physical inventory disclosed usable damaged goods which can be sold for PI 00,000. What
is the estimated cost of goods sold for the nine months ended September 30,2014?
A. 4,970,000 C. 5,500,000
B. 5,096,000 D. 5,600,000 PA 1 © 2014
22. On October 31, 2014, Pamela Company reported that a flood caused severe damage to the
entire inventory. Based on recent history, the entity has a gross profit of 25% of sales. The
following information is available from the records for ten months ended October 31, 2014:
Purchases 4,120,000
Sales 5,600,000
Sales allowances 100,000
A physical inventory disclosed usable damaged goods which can be sold for P70,000. Using
the gross profit method, what is the estimated cost of goods sold for the ten months ended
October 31,2014?
A. 3,360,000 C. 3,830,000
B. 3,825,000 D. 3,900,000 FA © 2014

Net income
23. The records of Mainstream Company were destroyed by flood at the end of the current year.
However, certain statistical data related to the income statement are available.
Interest expense 20,000
Cost of goods sold 2,000,000
Sales discount 100,000
The beginning inventory was P400,000 and decreased 20% during the year. Administrative
expenses are 25% of cost of goods sold but only 10% of gross sales. Four-fifths of the
operating expenses relate to sale activities. Ignoring income tax, what is the net income for
the current year?
A. 330,000 C. 400,000
B. 380,000 D. 480,000 FA © 2014
Comprehensive
Questions 24 & 25 are based on the following information. FA © 2014
Moderate Company provided the following information:
June July August
Sales on account 7,200,000 7,360,000 7,600,000
Cash sales 720,000 800,000 1,040,000
All merchandise is marked up to sell at invoice cost plus 20%. Inventory at the beginning of each
month is 30% of that month's cost of goods sold.
24. What i s the cost of goods sold for June?

A. 5,760,000 C. 6,080,000
B. 6,000,000 D. 6,600,000
25. What is the amount of purchases for July?

A. 6,528,000 C. 6,920,000
B. 6,800,000 D. 8,304,000

On October 15, 2014, a fire destroyed all inventory of Sham Company in a rented stockroom. The
records of the entity showed the following information:
Sales, January 1 - October 15 3,840,000
Sales return and allowance 40,000
Purchases, January 1 - October 15 3,560,000
Purchase return and allowance 60,000
Cost of stock in display room, not destroyed 320,000

Summary of prior years' sales:

2013 2012 2011
Sales 3,700,000 3,500,000 3,000,000
Gross profit 1,295,000 1,050,000 750,000
26. If the trend in gross profit rate continues, what is the estimated cost of merchandise lost in
the fire on October 15, 2014?
A. 1,210,000 C. 1,530,000
B. 1,400,000 D. 1,720,000
27. If the average gross profit rate is used, what is the estimated cost of merchandise lost in the
fire on October 15, 2014?
A. 1,020,000 C. 1,400,000
B. 1,340,000 D. 1,720,000
Questions 28 & 29 are based on the following information. P1 © 2014

In conducting an audit of Remy Company for the year ended June 30, 2014, the entity's CPA
observed the physical inventory at an interim date, May 31, 2014. The following information was
obtained:
Inventory, July 1, 2013 875,000

Physical inventory, May 31,2014 950,000
Sales for 11 months ended May 31, 2014 8,400,000
Sales for year ended June 30, 2014 9,600,000
Purchases for 11 months ended May 31, 2014 6,750,000
Purchases for year ended June 30, 2014 8,000,000
a. Shipments received in May and included in the physical inventory
but recorded as June purchases 75,000
b. Shipments received in unsalable condition and excluded from
physical inventory. Credit memos had not been received nor
had chargebacks to vendors been recorded:
Total at May 31,2014 10,000
Total at June 30,2014 (including the May unrecorded chargebacks) 15,000
c. Deposit made with vendor and charged to purchases in April, 2014.
Product was shipped in July, 2014 20,000
d. Deposit made with vendor and charged to purchases in May, 2014.
Product was shipped FOB destination, on May 29,2014 and
was included in May 31,2014 physical inventory as goods in transit 55,000

e. Through the carelessness of the receiving department a June shipment was damaged by rain.
This shipment was later sold in June at its cost of 100,000
28. What is the cost of goods sold for the month of June 2014?
A. 780,000 C. 960,000
B. 880,000 D. 980,000
29. What is the inventory on June 30, 2014?

A. 1,140,000 C. 1,240,000
B. 1,160,000 D. 1,340,000
Questions 30 thru 32 are based on the following information. P1 © 2014

Fairy Company provided the following information:
2014 2015
Net sales 7,500,000 4,500,000
Purchases 6,450,000 3,180,000
Freight in 350,000 220,000
Purchase discounts 90,000 45,000
Purchase returns 120,000 40,000
Purchase allowances 20,000 15,000
Ending inventory 2,355,000 ?
30. What is the amount of gross profit for 2014?

A. 2,025,000 C. 2,625,000
B. 2,250,000 D. 3,000,000
31. What is the gross profit rate for 2014?

A. 27% C. 35%
B. 30% D. 40%
32. What is the inventory on December 31, 2015?

A. 2,025,000 C. 2,505,000
B. 2,370,000 D. 3,285,000


On December 31, 2014, Empress Company had a fire which completely destroyed the goods in
process inventory. After the fire a physical inventory was taken. The raw materials were valued at
P600,000, the finished goods at PI,000,000 and supplies at P100,000 on December 31,2014. The
inventories on January 1, 2014 consisted of the following:
Finished goods 1,400,000
Goods in process 1,000,000
Raw materials 300,000
Supplies 400,000
Data for the current year
Sales 3,000,000
Purchases 1,000,000
Freight in 100,000
Direct labor 800,000
Manufacturing overhead - 50% of direct labor ?
Average gross profit rate 30%
33. What is the cost of goods sold?

A. 1,700,000 C. 2,100,000
B. 1,900,000 D. 2,300,000
34. What is the cost of goods manufactured?

A. 1,700,000 C. 2,500,000
B. 2,300,000 D. 3,100,000
35. What is the estimated cost of the goods in process on December 31, 2014 that were
completely destroyed by fire?
A. 1,300,000 C. 2,000,000
B. 1,700,000 D. 2,100,000
Questions 36 thru 38 are based on the following information. FA © 2014

On December 31, 2014, a fire broke out in the warehouse of Regatta Company destroying ah
inventory. The following data are available for 2014:
January 1 December 31
Inventory 500,000
Accounts receivable 480,000 440,000
Accounts payable 400,000 500,000
Collection on accounts receivable 2,640,000

Payments to suppliers 1,600,000

Goods out on consignment at sales price 200,000
Salvage value of inventory 20,000
2013 2012 2011

Sales 2,800,000 2,700,000 2,500,000
Gross profit 1,260,000 1,080,000 860,000
36. What is the amount of purchases for the current year?

A. 1,500,000 C. 1,700,000
B. 1,600,000 D. 2,100,000
37. What is the amount of sales for the current year?

A. 2,200,000 C. 2,640,000
B. 2,600,000 D. 2,680,000
38. What is the inventory fire loss on December 31, 2014?

A. 420,000 C. 508,000
B. 500,000 D. 600,000

Ori April 30,2014, a fire damaged the office of Amaze Company. The following balances were
gathered from the general ledger on March 31, 2014:
Accounts receivable 920,000
Inventory - January 1 1,880,000
Accounts payable 950,000
Sales 3,600,000
Purchases 1,680,000
* An examination of the April bank statement and canceled checks revealed checks written
during the period April 1-30 as follows:
Accounts payable as of March 31 240,000
April merchandise shipments 80,000
Expenses 160,000
Deposits during the same period amounted to P440,000 which consisted of collections
from customers with the exception of P20,000 refund from a vendor for merchandise
returned in April.
* Customers acknowledged indebtedness of P1,040,000 at April 30. Customers owed
another P60,000 that will never be recovered. Of the acknowledged indebtedness,
P40,000 may prove uncollectible.

* Correspondence with suppliers revealed unrecorded obligations at April 30, of P340,0.00

for April merchandise shipment, including PI00,000 for shipments in transit on that date.
* The average gross profit rate is 40%.
* Inventory with a cost of P260,000 was salvaged and sold for P140,000. The balance of
the inventory was a total loss.
39. What is total amount of sales up to April 30?

A. 4,140,000 C. 4,200,000
B. 4,160,000 D. 4,220,000
40. What is the total amount of purchases up to April 30?

A. 1,680,000 C. 2,020,000
B. 1,760,000 D. 2,100,000
41. What is the inventory on April 30?

A. 1,428,000 C. 1,464,000
B. 1,440,000 D. 1,476,000
42. What is the fire loss to be recognized on April 30?

A. 1,200,000 C. 1,340,000
B. 1,300,000 D. 1,440,000
Retail Method
Conservative retail inventory method
43. On December 31, 2014, Huff Company provided the following information:
Cost Retail
Inventory, January 1 735,000 1,015,000
Purchases 4,165,000 5,775,000
Additional markups - 210,000
Available for sale 4,900,000 7,000,000
Sales for the year totaled P5,530,000. Markdowns amounted to P70,000. Under the
approximate lower of average cost or marked retail method, what is the inventory on
December 31,2014?
A. 980,000 C. 1,400,000
B. 1,078,000 D. 1,540,000 PA 1 © 2014

44. Bouquet Company used the conventional retail inventory method to account for inventory.
Cost Retail
Beginning inventory and purchases 6,000,000 9,200,000
Net markup 400,000
Net markdown 600,000
Sales 7,800,000
What amount should be reported as cost of sales?
A. 4,800,000 C. 5,200,000
B. 4,875,000 D. 5,250,000 FA © 2014
45. Sublime Company showed the following information on December 31, 2014.
Cost Retail
Inventory, January 1 280,000 700,000
Sales 5,000,000
Purchases 2,480,000 5,160,000
Freight in 75,000 ,
Markup 500,000
Markup cancelation 60,000
Markdown 250,000
Markdown cancelation 50,000
Estimated normal shrinkage is 2% of sales.
The entity used the retail inventory method in estimating the value of its inventory. What is
the estimated cost of inventory on December 31, 2014 at approximate lower of average cost
and net realizable value?
A. 450,000 C. 495,000
B. 460,000 D. 506,000 FA © 2014
46. Carmela Company used the conservative retail inventory method. The following
information relating to the inventory was gathered at year-end:
Cost Retail
Beginning inventory 530,000 900,000
Purchases 6,080,000 8,700,000
Purchase discounts 85,000
Freight in 105,000
Markups 600,000
Markdowns 800,000
Sales 8,600,000

What is the ending inventory at year-end?

A. 520,000 C. 585,000
B. 568,000 D. 800,000 FA © 2014
Average cost retail method

47. Domicile Company had the following amounts all at retail:
Beginning inventory 180,000 Purchases 6,000,000
Purchase return 300,000 Net markup 900,000
Abnormal shortage 200,000 Net markdown 140,000
Sales 3,600,000 Sales return 90,000
Employee discounts 80,000 Normal shortage 130,000
What is the ending inventory at retail?
A. 2,720,000 C. 2,880,000
B. 2,800,000 D. 2,920,000 FA © 2014
48. Fainthearted Company provided the following information for the current year:
Cost Retail
Beginning inventory 750,000 1,000,000
Purchases 4,150,000 5,800,000
Additional markup - 200,000
Sales for the year totaled P5,500,000. Markdown amounted to P100,000. Under the average
cost approach in applying the retail method, what is the inventory at year-end?
A. 980,000 C. 1,050,000
B. 994,000 D. 1,400,000 FA © 2014
49. Dean Company used the retail inventory method to estimate inventory. Data relating
to the inventory computation on December 31,2014 are as follows:
Cost Retail
Purchases 4,080,000 6,300,000
Net markups 700,000
Sales 6,820,000
Estimated normal shoplifting losses 80,000
Net markdowns 500,000
Under the average cost retail method, what is the estimated inventory on December 31,
2014?
A. 360,000 C. 408,000
B. 384,000 D. 600,000 PA 1 © 2014

50. Abscond Company used the retail inventory method to estimate inventory for interim
statement purposes. Data relating to the computation of the inventory on December 31, 2014
are as follows:
Cost Retail
Inventory, January 1 720,000 1,000.000
Purchases 4,080,000 6,300,000
Markup 700,000
Markdown 500,000
Sales 5,900,000
Normal shoplifting losses 100,000
Under the average cost approach, what is the estimated cost of inventory on December 31,
2014?
A. 900,000 C. 1,024,000
B. 960,000 D. 1,500,000 FA © 2014
51. Caramel Company used the average retail inventory method. On December 31, 2014, the
following information relating to the inventory was gathered:
Cost Retail
Inventory, January 1 190,000 450,000
Purchases 2,990,000 4,350,000
Purchase discounts 40,000
Freight in 150,000
Markups 300,000
Markdowns 400,000
Sales 4,400,000
Sales return 100,000
Sales discount 50,000
Sales allowance 30,000
What is the estimated cost of the inventory on December 31,2014?
A. 245,000 C. 315,000
B. 280,000 D. 400,000 PA 1 © 2014
52. Diane Company showed the following information on December 31,2014:

Cost Retail
Sales 10,000,000
Purchases 4,960,000 10,320,000
Freight in 150,000
Markup 1,000,000

Markup cancelation 120,000

Markdown 500,000
Markdown cancelation 100,000
Estimated normal shrinkage is 2.5% of sales.
Diane used the average cost retail inventory method in estimating the value of
inventory. What is the estimated cost of inventory on December 31,2014?
A. 460,000 C. 897,000
B. 877,500 D. 990,000 PA 1 © 2014
53. On January 1, 2014, the stock inventory of Ron Company was P1,000,000 at retail and
P560,000 at cost. During the current year, the entity registered the following purchases:
Cost 4,000,000
Retail price 6,200,000
Original markup 2,200,000
The total net sales was P5,400,000. The following reductions were made in the retail price:
To meet price competition 50,000
To dispose of overstock 30,000
Miscellaneous reductions 120,000
During the current year, the selling price of a certain inventory increased from P200 to P300.
This additional markup applied to 5,000 items but was later canceled on the remaining 1,000
items. What is the inventory on December 31,2014 using the average cost retail method?
A. 1,200,000 C. 2,000,000
B. 1,240,000 D. 2,400,000 FA © 2014
54. Airborne Company used the average cost retail inventory method. The entity provided the
following information for the year ended December 31,2014.
Cost Retail
Inventory - January 1 1,650,000 2,200,000
Net purchases 3,725,000 4,950,000
Departmental transfer - credit 200,000 300,000
Net markup 150,000
Inventory shortage - sales price 100,000
Employee discounts 200,000
Sales (including sales of P400,000 of items which
were marked down from P500,000) 4,000,000
What is the estimated cost of inventory on December 31,2014?
A. 1,924,000 C. 2,250,000
B. 1,950,000 D. 2,600,000 PA 1 © 2014

55. Hutch Company used the average cost retail inventory method to account for inventory. The
following information related to operations for the current year:
Cost Retail
Net markups 400,000
Sales 7,800,000
What amount should be reported as cost of sales for the current year?
A. 4,800,000 C. 5,200,000
B. 4,875,000 D. 5,250,000 PA 1 © 2014
56. Bizarre Company had always inventoried finished goods at selling price and prepared the
following statement on this basis:
Sales 1,400,000
Raw materials used at cost 500,000
Labor 600,000
Overhead 240,000
Total 1,340,000
Work in process at cost:
January 1 612,000
December 31 752,000 140,000
Cost of goods manufactured 1,200,000
Finished goods at selling price:
January 1 240,000
December 31 840,000 600,000 600,000
Gross income 800,000
What is the cost of goods sold?
A. 200,000 C. 600,000
B. 500,000 D. 840,000 PA 1 © 2014
FIFO retail method

57. Union Company used the FIFO retail method of inventory valuation. The entity
provided the following information for the current year:
Cost Retail
Purchases 3,000,000 5,500,000
Net additional markups 500,000

Net markdowns 1,000,000

Sales revenue 4,500,000
What is the estimated cost of ending inventory?

A. 960,000 C. 1,040,000
B. 1,000,000 D. 1,200,000 FA © 2014
58. Groom Company used the LIFO retail method of inventory valuation. The entity provided
the following information for the current year:
Cost Retail
Net purchases 4,200,000 5,900,000
Net markups 200,000
Net sales 5,500,000
What is the estimated cost of ending inventory?
A. 1,400,000 C. 1,460,000
B. 1,440,000 D. 1,550,000 PA 1 © 2014
59. Emeritus Company which used the FIFO retail inventory method provided the following
information for the current year:
Cost Retail
Beginning inventory 1,200,000 1,800,000
Purchases 5,600,000. 7,200,000
Freight in 400,000
Net markup 1,400,000
Net markdown 600,000
Sales 7,600,000
What is the cost of goods sold for the current year?
A. 4,350,000 C. 5,594,000
B. 5,550,000 D. 5,682,000 FA © 2014
Net Realizable Value

60. Oligarchy Company has a partially-completed inventory with the following data:
Production costs incurred to date 2,900,000
Production costs to complete 2,000,000
Transport costs to customer 300,000
Future selling costs 400,000
Selling price 2,800,000

What is the net realizable value of the inventory?

A. 100,000 C. 2,100,000
B. 400,000 D. 2,800,000 FA © 2014
Lower Of Cost And Net Realizable Value

Work in process
61. Based on a physical inventory at year-end, Cherry Company determined the chocolate
inventory on a FIFO basis at P2,600,000 with a replacement cost of P2,500,000. Cherry
Company estimated that, after further processing costs of Pi,200,000, the chocolate could be
sold as finished candy bars for P4,000,000. The normal profit margin is 10% of sales.
Under the lower of cost and net realizable value, what amount should be reported as
chocolate inventory in the year-end statement of financial position?
A. 2,400,000 C. 2,600,000
B. 2,500,000 D. 2,800,000 FA © 2014
62. Based on a physical inventory taken on December 31,2014, Chewy Company determined
the chocolate inventory on a FIFO basis at P5,200,000 with a replacement cost of
P4,000,000. The entity estimated that, after further processing costs of P2,400,000, the
chocolate could be sold as finished candy bars for P8,000,000. The normal profit margin is
10% of sales. Using the measurement at the lower of cost and net realizable value, what
amount should be reported as chocolate inventory on December 31,2014?
A. 4,000,000 C. 5,200,000
B. 4,800,000 D. 5,600,000 PA 1 © 2014
63. Gracia Company used the lower of cost or net realizable value method to value inventory.
Data regarding the items in work in process inventory are presented below:
Markers Pens Highlighters
Historical cost 240,000 188,000 300,000
Selling price 360,000 250,000 360,000
Estimated cost to complete 48,000 50,000 68,000
Replacement cost 208,000 168,000 318,000
Normal profit margin as a percentage of selling price 25% 25% 10%
What is the measurement of the work in process inventory?
A. 676,000 C. 720,000
B. 694,000 D. 728,000 FA © 2014
Finished goods
64. Matrimony Company determined the year-end inventory on a FIFO basis at P4,000,000. The
entity provided the following information pertaining to the inventory:

Estimated selling price 4,050,000

Estimated cost of disposal 200,000
Normal profit margin 500,000
Current replacement cost 3,500,000
The entity measured inventory at the lower of cost and net realizable value. What is the
carrying amount of the inventory at year-end?
A. 3,350,000 C. 3,850,000
B. 3,500,000 D. 4,000,000 FA © 2014
65. Winter Company provided the following inventory data at year-end:
Cost NRV
Skis 2,200,000 2,500,000
Boots 1,700,000 1,500,000
Ski equipment 700,000 800,000
Ski apparel 400,000 500,000
What amount should be reported as inventory at year-end?
A. 4,800,000 C. 5,200,000
B 5,000,000 D. 5,300,000 PA 1 © 2014
66. Gatekeeper Company has two products with cost and selling price as follows:
Product X Product Y
Selling price 2,000,000 3,000,000
Estimated selling cost 600,000 700,000
Materials and conversion cost 1,500,000 1,800,000
General administration cost 300,000 800,000
At year-end, the manufacture of inventory has been completed but no selling cost has yet
been incurred. The inventory shall be measured at what amount?
A. 3,200,000 C. 3,700,000
B. 3,300,000 D. 3,800,000 FA © 2014
67. Chicago Company has two products in the inventory.

Product X Product Y
Selling price 2,000,000 3,000,000
Materials and conversion costs 1,500,000 1,800,000
General administration costs 300,000 800,000
Estimated selling costs 600,000 700,000
At the year-end, the manufacture of items of inventory has been completed but no selling
costs have yet been incurred. What is the measurement of Product X and Y, respectively?
A. 1,400,000 and 1,800,000 C. 1,500,000 and 1,800,000
B. 1,400,000 and 2,300,000 D. 1,500,000 and 2,300,000 PA 1 © 2014

68. Starstruck Company is a retailer of Italian furniture and has five major product lines. At year-
end, the entity provided the following inventory data:
Units Unit cost NRV per unit
Sofas 100 1,000 1,020
Dining tables 200 500 450
Beds 300 1,500 1,600
Closets 400 750 770
Lounge chairs 500 250 200
What is the inventory at year-end using the lower of cost and net realizable value?
A. 1,040,000 C. 1,998,000
B. 1,075,000 D. 2,033,000 FA © 2014
Loss on inventory writedown

69. On December 31,2014, Julie Company reported ending inventory at P3,000,000, and the
allowance for inventory writedown before any adjustment at P150,000. Relevant information
on December 31,2014 follows:
Product 1 Product 2 Product 2 Product 3
Historical cost 800,000 1,000,000 700,000 500,000
Replacement cost 900,000 1,200,000 1,000,000 600,000
Sales price 1,200,000 1,300,000 1,250,000 1,000,000
Net realizable value 550,000 1,100,000 950,000 350,000
Normal profit 250,000 150,000 300,000 300,000
What amount of loss on inventory writedown should be included in cost of goods sold?
A. 100,000 C. 250,000
B. 200,000 D. 400,000 PA 1 © 2014
Cost of goods sold

70. Greece Company provided the following data for the current year:
Inventory - January 1:
Cost 3,000,000
Net realizable value 2,800,000
Inventory - December 31:
Cost 4,000,000
What amount should be reported as cost of goods sold?
A. 7,000,000 C. 7,200,000
B. 7,100,000 D. 7,300,000 PA 1 © 2014

71. Uptown Company used the perpetual method to record inventory transactions for 2014.
Inventory 1,900,000
Sales 6,500,000
Sales return 150,000
Inventory losses 120,000
On December 24,2014, the entity recorded a P150,000 credit sale of goods costing
P100,000. These goods were sold on FOB destination terms and were in transit on December
31,2014. The goods were included in the physical count. The inventory on December 31,2014
determined by physical count had a cost of P2,000,000 and a net realizable value of
P1,700,000. Any inventory writedown is not yet recorded. What amount should be reported
as cost of goods sold for 2014?
A. 4,500,000 C. 4,920,000
B. 4,720,000 D. 5,020,000 PA 1 © 2014
72. Altis Company reported the following information for the current year:
Sales (100,000 units at P150) 15,000,000
Sales discount 1,000,000
Purchases 9,300,000
Purchase discount 400,000
The inventory purchases during the year were as follows:
Units Unit cost Total cost
Beginning inventory, January 1 20,000 60 1,200,000
Purchases, quarter ended March 31 30,000 65 1,950,000
Purchases, quarter ended June 30 40,000 70 2,800,000
Purchases, quarter ended Sept. 30 50,000 75 3,750,000
Purchases, quarter ended Dec. 31 10,000 80 800,000
150,000 10,500,000
The accounting policy is to report inventory in the financial statements at the lower of cost
and net realizable value. Cost is determined under the first-in, first-out method. The entity
has determined that, on December 31,2014, the replacement cost of inventory was P70 per
unit and the net realizable value was P72 per unit. The normal profit margin is P10 per unit.
What amount should be reported as cost of goods sold for the current year?
A. 6,300,000 C. 6,700,000
B. 6,500,000 D. 6,900,000 PA 1 © 2014

Adjusting entry
73. In 2014, North Company experienced a decline in the value of inventory resulting in a
writedown from P3,600,000 to P3,000,000. The entity used the allowance method to record
the necessary adjustment. In 2015, market conditions have improved dramatically. On
December 31,2015, the inventory had a cost of P5,000,000 and net realizable value of
P4,600,000. What is included in the adjusting entry on December 31, 2015?
A. Debit allowance for inventory writedown P200,000
B. Credit allowance for inventory writedown P400,000
C. Debit gain on reversal of inventory writedown P200,000
D. Credit gain on reversal of inventory writedown P400,000
Comprehensive
Questions 1 thru 3 are based on the following information.
White Company carried four items in inventory. The following per-unit data relate to these items at
the end of first year of operations:
Units Cost Sale price Selling cost Normal profit

Category 1:
A 25,000 105 130 15 20
B 20,000 85 90 10 10
Category 2:
C 40,000 50 45 5 5
D 30,000 65 75 15 10
74. What is the measurement of inventory under LCNRV applied to individual item?
A. 7,625,000 C. 7,875,000
B. 7,725,000 D. 8,275,000
75. What is the measurement of inventory under LCNRV applied to inventory category?
A. 7,625,000 C. 7,875,000
B. 7,725,000 D. 8,275,000
76. What is the measurement of inventory under LCNRV applied to inventory as a whole?
A. 7,625,000 C. 7,875,000
B. 7,725,000 D. 8,275,000

Purchase commitment
77. On October 1, 2014, Gorgeous Company entered into a 6-month, P5,200,000 purchase
commitment for a supply of a special product. On December 31,2014, the market value of
this material had fallen to P5,000,000.On March 31, 2015, the market value of the purchase
commitment is P4,900,000. What is the loss on purchase commitment to be recognized on
March 31,2015?
A. 0 C. 200,000
B. 100,000 D. 300,000 FA © 2014
78. On December 31, 2014, Dos Company has outstanding purchase commitments for 50,000
gallons at P20 per gallon of raw material. It is determined that the market price of the raw
material has declined to P17 per gallon on December 31,2014 and it is expected to decline
further to P15 in the first quarter of 2015. What is the loss on purchase commitment that
should be recognized in 2014?
A. 0 C. 250,000
B 150,000 D. 850,000 PA 1 © 2014
79. On January 1,2014, Card Company signed a three-year, noncancelable purchase contract,
which allows Card to purchase up to 5,000 units of a computer part annually from Hart
Company at P100 per unit and guarantees a minimum annual purchase of 1,000 units. During
2014, the part unexpectedly became obsolete. Card had 2,500 units of this inventory on
December 31,2014, and believed these parts can be sold as scrap for P20 per unit. What
amount of loss from the purchase commitment should be reported in the 2014 income
statement?
A. 160,000 C. 240,000
B. 200,000 D. 360,000 FA © 2014
80. On November 15, 2014, Diamond Company entered into a commitment to purchase 10,000
ounces of gold on February 15,2015 at a price of P310 per ounce. On December 31, 2014,
the market price of gold is P270 per ounce. On February 15,2015, the price of gold is P300
per ounce. What is the gain on purchase commitment to be recognized on February 15,2015?
A. 0 C. 300,000
B. 100,000 D. 400,000 FA © 2014
81. On November 15, 2014, Damascus Company entered into a commitment to purchase
100,000 barrels of aviation fuel for P55 per barrel on March 31, 2015. The entity entered into
this purchase commitment to protect itself against the volatility in the aviation fuel market. By
December 31,2014 the purchase price of aviation fuel had fallen to P40 per barrel. However,
by March 31, 2015, when the entity took delivery of the 100,000 barrels the price of aviation

fuel had risen to P60 per barrel. What amount should be recognized as gain on purchase
commitment for 2015?
A. 0 C. 1,500,000
B. 500,000 D. 2,000,000 PA 1 © 2014
MCQ – Problems: Biological Assets

Inventories
82. Colombia Company is a producer of coffee. The entity is considering the valuation of
harvested coffee beans. Industry practice is to value the coffee beans at market value and
uses as reference a local publication "Accounting for Successful Farms".
On December 31, 2014, the entity has harvested coffee beans costing P3,000,000 and with
fair value less cost of disposal of P3,500,000 at the point harvest.
Because of long aging and maturation process after harvest, the harvested coffee beans
were still on hand on December 31, 2015. On such date, the fair value less cost of disposal
is P3,900,000 and the net realizable value is P3,200,000.
What is the measurement of the coffee beans inventory on December 31,2015?
A. 3,000,000 C. 3,500,000
B. 3,200,000 D. 3,900,000 P1 © 2014
Biological assets
83. Forester Company has reclassified certain assets as biological assets. The total value of the
forest assets is P6,000,000 which comprises:
Freestanding trees 5,100,000
Land under trees 600,000
Roads in forests 300,000
6,000,000
In the statement of financial position, what total amount of the forest assets should be
classified as biological assets?
A. 5,100,000 C. 5,700,000
B. 5,400,000 D. 6,000,000 P1 © 2014
84. Africa Company purchased 2,000 llamas at the beginning of current year. These llamas will
be sheared semiannually and their wool sold to specialty clothing manufacturers. The llamas
were purchased for P5,000,000. During the current year, the change in fair value due to
growth and price changes is P350,000, the wool harvested but not yet sold is valued at net
realizable value of P100,000, and the decrease in fair value due to harvest is P50,000. What
is the carrying amount of the biological asset at year-end?
A. 5,100,000 C. 5,350,000
B. 5,300,000 D. 5,400,000 FA © 2014
MCQ – Problems: Biological Assets Page 48

Biological Assets
85. Salve Company is engaged in raising dairy livestock. Information regarding activities relating
to the dairy livestock during the current year is as follows:
Carrying amount on January 1 5,000,000
Increase due to purchases 2,000,000
Gain arising from change in fair value less cost of disposal
attributable to price change 400,000
Gain arising from change in fair value less cost of disposal
attributable to physical change 600,000
Decrease due to sales 850,000
Decrease due to harvest 200,000
What is the carrying amount of the biological asset on December 31 ?
A. 6,000,000 C. 7,150,000
B. 6,950,000 D. 8,000,000 P1 © 2014
Comprehensive
Joan Company provided the following data:
Value of biological asset at acquisition cost on Dec. 31,2014 600,000
Fair valuation surplus on initial recognition at fair value on Dec. 31,2014 700,000
Change in fair value to December 31, 2015 due to growth and price fluctuation 100,000
Decrease in fair value due to harvest 90,000
86. What is the carrying amount of the biological asset on December 31, 2015?
A. 1,300,000 C. 1,400,000
B. 1,310,000 D. 1,490,000
87 What is the gain from change in fair value of biological asset that should be reported in the
2015 income statement?
A. 10,000 C. 710,000
B. 100,000 D. 800,000

Righteous Company provided the following data:
Value of biological asset at acquisition cost on December 31, 2014 6,000,000
Fair valuation surplus on initial recognition at fair value on December 31, 2014 500,000
Change in fair value on December 31, 2015 due to growth and price fluctuation 900,000

88. What is the carrying amount of the biological asset on December 31, 2015?
A. 6,500,000 C. 7,400,000
B. 7,300,000 D. 7,500,000
89. What amount of net gain from the change in fair value of biological asset should be reported
in 2015?
A. 800,000 C. 1,300,000
B. 900,000 D. 1,400,000

Bear Company produces milk for sale to local and national ice cream producers. The entity began
operations on January 1, 2014 by purchasing 650 milk cows for P8,000,000. The entity had the
following information available at year-end relating to the cows:
Acquisition cost, January 1,2014 8,000,000
Change in fair value due to growth and price changes 2,500,000
Milk harvested during 2014 but not yet sold 400,000
90. What amount of gain on change in fair value should be recognized for biological asset in
2014?
A. 2,250,000 C. 2,650,000
B. 2,500,000 D. 2,900,000
91. What amount of gain on change in fair value should be reported for agricultural produce in
2014?
A. 0 C. 400,000
B. 150,000 D. 2,250,000

Legend Dairy produced milk for local ice cream producers. The entity began operations at the
beginning of current year by purchasing milking cows for P2,000,000. The entity provided the
following information at year-end relating to the milking cows:
Carrying amount - January 1 2,000,000
Change in fair value due to growth and price change 400,000
Milk harvested during the year but not yet sold 150,000
92. What amount of net gain on biological asset should be reported in the current year?
A. 350,000 C. 550,000
B. 400,000 D. 600,000

Biological Assets
93. What amount of gain on agricultural produce should be recognized in the current year?
A. 100,000 C. 350,000
B. 150,000 D. 400,000

Dairy Company provided the following information for the year ended December 31,2014:
Cash 500,000
Trade and other receivables 1,500,000
Inventories 100,000
Dairy livestock - immature 50,000
Dairy livestock - mature 400,000
Property, plant and equipment, net 1,400,000
Trade and other payables 520,000
Note payable - long-term 1,500,000
Share capital 1,000,000
Retained earnings - January 1 800,000
Fair value of milk produced 600,000
Gain from change in fair value 50,000
Inventories used 140,000
Staff costs 120,000
Depreciation expense 15,000
Other operating expenses 190,000
Income tax expense 55,000
94. What is the net income for 2014?

A. 130,000 C. 600,000
B. 185,000 D. 650,000
95. What is the fair value of biological assets on December 31, 2014?
A. 400,000 C. 500,000
B. 450,000 D. 550,000


Honey Company has a herd of 10 2-year old animals on January 1, 2014. One animal aged 2.5
years was purchased on July 1,2014 for PI08, and one animal was born on July 1, 2014. No
animals were sold or disposed of during the year. The fair value less cost of disposal per unit is as
follows:
2 - year old animal on January 1 100
2.5-year old animal on July 1 108
New born animal on July 1 70
2 - year old animal on December 31 105
2.5 - year old animal on December 31 111
Newborn animal on December 31 72
3 - year old animal on December 31 120
0.5 - year old animal on December 31 80
96. What is the fair value of the biological assets on December 31, 2014?
A. 1,320 C. 1,400
B. 1,360 D. 1,440
97. What is the gain from change in fair value of biological assets that should be recognized in
2014?
A. 222 C. 300
B. 292 D. 332
98. What is the gain from change in fair value due to price change?
A. 55 C. 237
B. 222 D. 292
Questions 99 thru 101 are based on the following information. FA © 2014

Temerity Company has different kinds of farm animals on January 1, 2014. During the current
year, several acquisitions occurred related to these farm animals. A detailed summary of these
transactions is as follows:
Carrying amount on January 1:
15 Horses (1 year old) 1,000,000
10 Dairy cattle (2 years old) 400,000
8 Carabaos (2.5 years old) ' 200,000
20 Hogs (3 years old) 500,000
Purchases on June 30:
4 Dairy cattle (1 year old) 150,000
6 Carabaos (6 months old) 100,000

Biological Assets
Fair value less cost of disposal on December 31:

15 Horses (1 year old) 1,200,000
8 Carabaos (2.5 years old) 250,000
4 Dairy cattle (1 year old) 170,000
6 Carabaos (6 months old) 110,000
Fair value less cost of disposal on December 31:
15 Horses (2 years old) 1,350,000
4 Dairy cattle (1.5 years old) 200,000
6 Carabaos (1 year old) 140,000
There were no farm animals sold during the year and neither were there any newborns nor deaths.
99. What is the carrying amount of the biological assets on December 31?
A. 2,350,000 C. 2,800,000
B. 2,380,000 D. 3,160,000
100. What is the gain from change in fair value attributable to price change?
A. 0 C. 450,000
B. 360,000 D. 810,000
101. What is the gain from change in fair value attributable to physical change?
A. 360,000 C. 700,000
B. 450,000 D. 810,000
Farmland Company produces milk on its farms. The entity produces 20% of the community's milk
that is consumed. Farmland Company owns 5 farms and had a stock of 2,100 cows and 1,050
heifers.
The farms produce 800,000 kilograms of milk a year and the average inventory held is 15,000
kilograms of milk. However, on December 31,2014 the entity is currently holding 50,000 kilograms
of milk in powder. On December 31,2014, the biological assets are:
Purchased before January 1, 2014 (3 years old) 2,100 cows

Purchased on January 1,2014 (2 years old) 300 heifers
Purchased on July 1,2014 (1.5 years old) 750 heifers

No animals were born or sold during the current year. The unit fair value less cost of disposal is as
follows.
January 1, 2014: 1-year old 3,000

2-year old 4,000
July 1,2014: 1-year old 3,000
December 31, 2014: 1-year old 3,200
2-year old 4,500
1.5-year old 3,600
3-year old 5,000
The entity has had problems during the year. Contaminated milk was sold to customers. As a result,
milk consumption has gone down.
The entity's business is spread over different parts of the country. The only region affected by the
contamination was Batangas. However, the cattle in this area were unaffected by the contamination
and were healthy. The entity feels that it cannot measure the fair value of the cows in the region
because of the problems created by the contamination. There are 600 cows and 200 heifers in the
Batangas farm and all these animals had been purchased on January 1, 2014.
102. What is the fair value of biological assets on January 1, 2014?

A. 7,200,000 C. 9,300,000
B. 8,400,000 D. 9,600,000
103. What is the fair value of biological assets purchased on July 1, 2014?
A. 2,250,000 C. 3,375,000
B. 3,000,000 D. 3,750,000
104. What is the fair value of biological assets on December 31, 2014?
A. 11,850,000 C. 15,225,000
B. 14,550,000 D. 15,750,000
105. What is the increase in fair value of biological assets on December 31, 2014?
A. 3,000,000 C. 5,250,000
B. 4,950,000 D. 6,150,000
106. What is the increase in fair value of biological assets due to physical change?
A. 1,260,000 C. 1,740,000
B. 1,440,000 D. 3,000,000

Inventory – Cost Estimation & Biological Assets
ANSWER KEY THEORY

1.D 26.B 51.D
2.C 27.D 52.D
3.D 28.B 53.D
4.B 29.B 54.D
5.D 30.A 55.C
6.A 31.B 56.B
7.B 32.C 57.A
8.D 33.A 58.C
9.D 34.D 59.D
10.C 35.B 60.D
11.C 36.C
12.D 37.D
13.D 38.C
14.B 39.D
15.C 40.A
16.B 41.C
17.D 42.B
18.A 43.A
19.B 44.D
20.D 45.C
21.C 46.D
22.C 47.A
23.B 48.A
24.A 49.A
25.A 50.A
Answer Key Page 55

ANSWER KEY PROBLEMS

1.C 26.B 51.B 76.A 101.A
2.C 27.A 52.C 77.B 102.C
3.C 28.D 53.B 78.B 103.A
4.C 29.A 54.B 79.B 104.B
5.B 30.A 55.C 80.C 105.A
6.A 31.A 56.D 81.C 106.C
7.A 32.B 57.D 82.B
8.B 33.C 58.D 83.A
9.A 34.A 59.B 84.B
10.C 35.A 60.A 85.B
11.C 36.C 61.C 86.B
12.A 37.B 62.C 87.A
13.B 38.B 63.C 88.B
14.D 39.C 64.C 89.A
15.B 40.D 65.A 90.A
16.A 41.B 66.A 91.C
17.B 42.A 67.A 92.A
18.A 43.A 68.A 93.B
19.A 44.D 69.C 94.A
20.D 45.A 70.B 95.B
21.D 46.A 71.C 96.C
22.D 47.A 72.B 97.B
23.B 48.B 73. 98.A
24.D 49.B 74. 99.D
25.C 50.B 75. 100.C
Answer Key Page 56

ANSWER EXPLANATION
1. Answer is (C).
Sales 480,000 / 12% 100% 4,000,000
Cost of sales 15% / 25% 60%
Selling expense 10%
Administrative expenses 15%
Bad debts 3%
Net income 12% 480,000
2. Answer is (C).
Sales 9,600,000
Cost of sales (9,600,000 / 125%) 7,680,000
Gross profit 1,920,000
3. Answer is (C).
Goods available for sale (5,500,000 + 4,300,000 - 200,000) 9,600,000
Cost of goods sold (7,500,000 /125%) (6,000,000)
Inventory - March 31 3,600,000
4. Answer is (C).
Goods available for sale (5,500,000 + 4,300,000 - 200,000) 9,600,000
Cost of goods sold (7,500,000 /125%) (6,000,000)
Inventory - March 31 3,600,000
5. Answer is (B).
Inventory – January 1 650,000
Purchases 3,200,000
Freight-in 50,000
Total 3,250,000
Less: Purchase returns 75,000 3,175,000
Goods available for sale 3,825,000
Less: Cost of sales (4,500,000 x 60%) 2,700,000
Inventory – March 31 1,125,000
6. Answer is (A).
Goods available for sale (2,500,000 + 7,500,000) 10,000,000
Cost of goods sold (15,000,000/166 2/3%) (9,000,000)
Answer Explanations & Solutions Page 57

Inventory - October 31 1,000,000

Undamaged inventory ( 150,000)
Inventory destroyed by fire 850,000
7. Answer is (A).
Cost ratio (560,000 / 800,000) 70%
Net purchases (100,000 + 4,000 – 6,000) 98,000
Goods available for sale 298,000
Cost of sales (70% x 320,000) 224,000
Inventory – June 30 74,000
Inventory in showroom (10% x 200,000 + 8,000) 28,000
Fire loss 46,000
8. Answer is (B).
Net sales in 2013 8,000,000
Less: Cost of sales:
Net purchases in 2013 4,800,000
Less: Ending inventory 1,200,000 5,600,000
Gross profit rate (2,400,000/8,000,000) 30%
Inventory, January 1, 2014 1,200,000
Net purchases – 2014 4,960,000
Less: Cost of sales
Sales 7,880,000
Less: Sales return & allowances 80,000
Net sales 7,800,000
Cost of sales (7,800,000 x 70%) 5,460,000
Estimated value of ending inventory 700,000
Less: Cost of inventory not stolen 100,000
Estimated cost of stolen inventory 600,000
9. Answer is (A).
Raw materials – January 1 300,000
Purchases 1,000,000
Freight in 100,000 1,100,000

Raw materials available for use 1,400,000

Less: Raw materials – December 31 600,000
Raw materials used 800,000
Manufacturing overhead (50% x 800,000) 400,000
Total manufacturing cost 2,000,000
Add: Goods in process – January 1 1,000,000
Total goods in process 3,000,000
Less: Goods in process – December 31 (squeeze) 1,300,000
Add: Finished goods – January 1 1,400,000
Les: Finished goods – December 31 1,000,000
Cost of sales (70% x 3,000,000) 2,100,000
The amount of goods in process on December 31 is computed as simply working back.
10. Answer is (C).

Sales – 2013 6,000,000
Cost of sales:
Less: Inventory – December 31, 2013 1,000,000 4,500,000
Gross income 1,500,000
Rate in 2013 (1,500,000 / 6,000,000) = 25%
Rate in 2014 (25% + 5%) = 30%
Inventory – January 1, 2014 1,000,000

Net purchases – 2014 7,500,000
Inventory – December 31, 2014 2,200,000
Less: Undamaged merchandise (500,000 x 70%) 350,000
Realizable value of damaged merchandise 10,000 360,000
Fire loss 1,840,000
11. Answer is (C).

Average gross profit rate (2,250,000/9,000,000) 25%


Cost of sales (5,600,000 x 75%) (4,200,000)
Inventory - September 30 700,000
Less: Undamaged goods (60,000 x 75%) 45,000
Realizable value of damaged goods 25,000 70,000
Fire loss 630,000
12. Answer is (A).

Net sales 2012 and 2013 7,400,000
Cost of sales:
Inventory - January 1,2012 848,000
Net purchases 2012 and 2013 5,372,000
Inventory - December 31,2013 (1,040,000) 5,180,000
Average gross profit rate (2,220,000/7,400,000) 30%
Inventory - January 1,2014 1,040,000
Net purchases - 2014 3,360,000
Cost of sales (70% x 4,000,000) (2,800,000)
Inventory - December 31, 2014 1,600,000
Fire loss (50% x 1,600,000) 800,000
13. Answer is (B).

Sales – 2012 and 2013 7,400,000
Cost of sales:
Inventory – 1/1/2012 850,000
Purchases – 2012 and 2013 5,370,000
Less: Inventory – 12/31/2013 1,040,000 5,180,000
Average rate (2,220,000 / 7,400,000) 30%
Inventory – 1/1/2014 1,040,000
Purchases – 2014 4,360,000
Les: Cost of sales (5,000,000 x 705) 3,500,000
Inventory – 12/31/2014 1,900,000

Less: Goods consigned (300,000 x 70%) 210,000

Goods in transit 190,000 400,000
Fire loss 1,500,000
14. Answer is (D).

Inventory – January 1 6,600,000
Purchases 1,000,000
Freight-in 300,000
Cost of good sold (7,800,000 x 70%) 5,460,000
Ending inventory destroyed 4,440,000
15. Answer is (B).

Ending inventory destroyed by fire 1,600,000
In the absence of any contrary statement, the gross profit rate is based on sales. Thus, if the
gross profit rate is 30%o on sales, the cost ratio is 70%.
16. Answer is (A).

Collections of accounts receivable 8,400,000
Accounts receivable - January 1 (700,000)
Accounts receivable - December 31 1,100,000
Sales on account 8,800,000
Cash sales 900,000
Total sales 9,700,000

Purchases 5,500,000
Cost of goods sold (9,700,000 x 60%) (5,820,000)
Inventory - December 31 1,180,000
17. Answer is (B).

Purchases 2,500,000


Inventory – December 31 600,000
Less: Physical inventory 500,000
Missing inventory 100,000
18. Answer is (A).

Sales 3,400,000
Sales returns ( 30,000)
Net sales 3,370,000
The sales discounts are ignored for purposes of estimating inventory under the gross profit
method.
Purchases 2,300,000
Purchase returns (80,000)
Freight in 60,000
Cost of sales (70% x 3,370,000) (2,359,000)
Inventory - December 31 571,000
Physical inventory - December 31 420,000
Cost of missing inventory 151,000
19. Answer is (A).

Sales 3,400,000
Net sales 3,370,000
The sales discounts are ignored for purposes of estimating inventory under the gross profit
method.
Purchases 2,300,000
Freight in 60,000
Cost of sales (70% x 3,370,000) (2,359,000)
Physical inventory - December 31 420,000
Cost of missing inventory 151,000
20. Answer is (D).

Cost of sales (3,640,000 / 130%) 2,800,000

21. Answer is (D). Cost of goods sold (7,280,000 /130%) 5,600,000
22. Answer is (D).

Sales 5,600,000
Net sales 5,200,000
Cost of goods sold (75% x 5,200,000) 3,900,000
Like sales discounts, sales allowances are ignored in determining net sales under the gross
profit method.
23. Answer is (B).

Cost of goods sold (10% / 25%) 40%
Gross sales (2,000,000 / 40%) 5,000,000
Sales discount (100,000)
Net sales 4,900,000
Cost of goods sold (2,000,000)
Administrative expenses (25% x 2,000,000) (500,000)
Selling expense (500,000 / 20%) – 500,000 (2,000,000)
Interest expense (20,000)
Net income 380,000
24. Answer is (D).

Cost of goods sold for June (7,200,000 + 720,000 = 7,920,000 /120%) 6,600,000
25. Answer is (C).

Cost of goods sold for July (7,360,000 + 800,000 = 8,160,000/120%) 6,800,000
Cost of goods sold for August (7,600,000 + 1,040,000 = 8,640,000 /120%) 7,200,000
Inventory - July 1 (30% x 6,800,000) 2,040,000
Purchases for July (SQUEEZE) 6,920,000
Inventory-July 31 (30% x 7,200,000) (2,160,000)
Cost of goods sold for July 6,800,000
26. Answer is (B).

Gross profit rate:
2011 (750,000 / 3,000,000) 25%
2012 (1,050,000 / 3,500,000) 30%

2013 (1,295,000 / 3,700,000) 35%

2014 40%
There seems to be a trend in the gross profit rate, which is a yearly increase of 5%. Thus, it
can be safely assumed that the trend continues in 2014.
Inventory – January1 500,000
Net purchases, January 1 – October 15 3,500,000
Sales 3,840,000
Sales return & allowances (40,000)
Net sales 3,800,000
Cost of sales (3,800,000 x 60%) 2,280,000
Inventory – October 15 1,720,000
Less: Inventory not destroyed 320,000
Fire loss 1,400,000
27. Answer is (A).

Cost of sales (70% x 3,800,000) 2,660,000
Inventory, October 15 1,340,000
Inventory not destroyed 320,000
Fire loss 1,020,000
28. Answer is (D).

Physical inventory Purchases up to Purchases up to
May 31, 2014 May 31, 2014 June 30, 2014
Balances 950,000 6,750,000 8,000,000
a - 75,000
b - ( 10,000) ( 15,000)
c - (20,000) (20,000)
d ( 55,000) ( 55,000) -
Adjusted 895,000 6,740,000 7,965,000
Inventory - July 1,2013 875,000
Purchases up to May 31, 2014 6,740,000
Inventory-May 31,2014 ( 895,000)
Sales up to May 31, 2014 8,400,000


Gross profit rate (1,680,000/8,400,000) 20%
Sales for June (9,600,000-8,400,000) 1,200,000

Cost of goods sold with profit (1,100,000 x 80%) 880,000
Cost of goods sold without profit 100,000
Cost of goods sold during June 2014 980,000
29. Answer is (A).

Inventory, July 1, 2013 875,000
Purchases for year ended June 30, 2014 (as adjusted) 7,965,000
Less: Cost of goods sold
Sales with profit (9,500,000 x 80%) 7,600,000
Sales without profit 100,000 7,700,000
Inventory, June 30,2014 1,140,000
30. Answer is (A).

Net sales - 2014 7,500,000
Cost of sales:
Purchases 6,450,000
Freight in 350,000
Purchase discounts ( 90,000)
Purchase allowances ( 20,000)
Ending inventory (2,355,000) 5,475,000
31. Answer is (A). Gross profit rate for 2014 (2,025,000/7,500,000) 27%
32. Answer is (B).

Beginning inventory - 2015 2,355,000
Purchases 3,180,000
Freight in 220,000
Purchase allowances (15,000)


Cost of sales- 2015 (4,500,000 x 73%) 3,285,000
Ending inventory - 2015 2,370,000
Sales 100%
Cost of sales 73%
Gross profit rate 27%
33. Answer is (C). Cost of goods sold (70% x 3,000,000), 2,100,000
34. Answer is (A).

Finished goods - January 1 1,400,000
Cost of goods manufactured (SQUEEZE) 1,700,000
Finished goods-December 31 (1,000,000)
The cost of goods manufactured is "squeezed" by simply working back from the cost of goods
sold.
35. Answer is (A).

Raw materials - January 1 300,000
Purchases 1,000,000
Freight in 100,000 1,100,000
Raw materials available for use 1,400,000
Raw materials - December 31 (600,000)
Raw materials used 800,000
Manufacturing overhead (50% x 800,000) 400,000
Total manufacturing cost 2,000,000
Goods in process - January 1 1,000,000
Total goods in process 3,000,000
Goods in process - December 31 (SQUEEZE) (1,300,000)
The amount of goods in process on December 31,2014 is "squeezed" by simply working back
from the cost of goods manufactured.
36. Answer is (C).

Purchases = 500,000 + 1,600,000 – 400,000 = 1,700,000

37. Answer is (B).

Sales 440,000 + 2,640,000 – 480,000 2,600,000
38. Answer is (B).

3,200,000
Average gross profit rate = 8,000,000 = 40%

Purchases (1,600,000 + 500,000 – 400,000) 1,700,000
Collections 2,640,000
Accounts receivable – 12/31 440,000
Accounts receivable – 1/1 (480,000)
Sales 2,600,000
Cost of sales (2,600,000 x 60%) 1,560,000
Inventory – 12/1 640,000
Less: Goods on consignment (200,000 x 60%) 120,000
Salvage value 20,000 140,000
Fire loss 500,000
39. Answer is (C).

Accounts receivable - April 30 1,040,000
Writeoff 60,000
Collections from customers (440,000 - 20,000) 420,000
Total 1,520,000
Less: Accounts receivable - March 31 920,000
Sales for April 600,000
Sales up to March 31 3,600,000
Total sales 4,200,000
40. Answer is (D).

Accounts payable - April 30 for April shipments 340,000
Payment for April merchandise shipments 80,000
Purchases of April 420,000
Purchases up to March 31 1,680,000
Total purchases up to April 30 2,100,000

41. Answer is (B).

Purchases 2,100,000
Purchase return ( 20,000)
Cost of sales (4,200,000 x 60%) (2,520,000)
Inventory - April 3 0 1,440,000
42. Answer is (A).

Inventory - April 3 0 1,440,000
Goods in transit ( 100,000)
Salvage value of inventory ( 140,000)
Fire loss 1,200,000
43. Answer is (A).

Cost Retail
Markdowns ( 70,000)
Sales (5,530,000)
Conservative cost ratio (4,900/7,000) 70%
Inventory - December 31 at cost 980,000
The approximate lower of average cost or market retail method is the same as the
conservative or conventional retail approach.
44. Answer is (D).

Cost Retail
Net markup . 400,000
Goods available for sale 6,000,000 9,600,000
Cost ratio (6,000/9600) = 62.5%
Sales (7,800,000)
Net markdown (600,000)
Ending inventory 1,200,000
Conservative cost (1,200,000 x 62.%) 750,000
Less: Ending inventory 750,000
Cost of sales 5,250,000

45. Answer is (A).

Cost Retail
Inventory – January 1 280,000 700,000
Purchases 2,480,000 5,160,000
Freight in 75,000
Markup 500,000
Markup cancellation . (60,000)
Cost rate (2,835,000/6,300,000) = 45%
Markdown (250,000)
Markdown cancellation . 50,000
Goods available for sale – Average 2,835,000 6,100,000
Sales (5,000,000)
Shrinkage (2% x 5,000,000) (100,000)
Inventory – December 31 1,000,000
Conservative cost (1,000,000 x 45%) 450,000
46. Answer is (A).

Cost Retail
Beginning inventory 530,000 900,000
Purchases 6,080,000 8,700,000
Purchase discounts (85,000)
Freight in 105,000
Markups . 600,000
GAS - conservative 6,630,000 10,200,000
Conservative cost ratio(6,630,000 /10,200,000 = 65%)
Markdowns (800,000)
GAS - Average 6,630,000 9,400,000
Sales (8,600,000)
Ending inventory at retail 800,000
Ending inventory at cost (800,000 x 65%) 520,000
47. Answer is (A).

Beginning inventory 180,000
Purchases 6,000,000
Purchase return ( 300,000)
Net markup 900,000
Net markdown ( 140,000)
Goods available for sale at retail 6,640,000

Less: Sales 3,600,000

Sales return (90,000)
Employee discounts 80,000
Normal shortage 130,000
Abnormal shortage 200,000 3,920,000
Ending inventory at retail 2,720,000
48. Answer is (B).

Cost Retail
Markdown (100,000)
Sales (5,500,000)
Inventory, December 31 1,400,000
Cost rate (4,900,000/6,900,000) = 71%
Average cost (1,400,000 x 71%) 994,000
49. Answer is (B).

Cost Retail
Inventory - January 1 720,000 1,000,000
Purchases 4,080,000 6,300,000
Net markups . 700,000
Available for sale - conservative 4,800,000 8,000,000
Cost ratio (4,800,000/8,000,000) 60%
Net markdowns . (500,000)
Available for sale - average 4,800,000 7,500,000
Cost ratio (4,800,000/7,500,000) 64%
Sales (6,820,000)
Estimated shoplifting losses (80,000)
Conservative cost (600,000 x 60%) 360,000
Average cost (600,000 x 64%) 384,000
The requirement is the average cost approach.
50. Answer is (B).

Cost Retail
Inventory – January 1 720,000 1,000,000
Purchases 4,080,000 6,300,000
Markup 700,000

Markdown . (500,000)
Cost ratio (4,800/7500) – 64%
Sales (5,900,000)
Normal shrinkage and breakage (100,000)
Inventory at retail 1,500,000
Average cost (1,500,000 x 64%) 960,000
51. Answer is (B).

Cost Retail
Inventory - January 1 190,000 450,000
Purchases 2,990,000 4,350,000
Freight in 150,000
Markups 300,000
Markdowns . ( 400,000)
GAS-Average (cost ratio-70%) 3,290,000 4,700,000
Net sales (4,400,000 - 100,000) (4,300,000)
Ending inventory at retail 400,000
Average cost (400,000 x 70%) 280,000
Note that the sales discount and sales allowance are ignored in determining the net sales
under the retail method.
52. Answer is (C).

Cost Retail
Purchases 4,960,000 10,320,000
Freight in 150,000
Markup 1,000,000
Markup cancelation . (120,000)
Available for sale - conservative 5,670,000 12,600,000
Cost ratio (5,670 / 12,600) 45%
Markdown (500,000)
Markdown cancelation . 100,000
Available for sale - average 5,670,000 12,200,000
Cost ratio (5,670/12,200) 46%
Sales (10,000,000)
Shrinkage (10,000,000x2.5%) ( 250,000)

Conservative cost (1,950,000 x 45%) 877,500

Average cost (1,950,000 x 46%) 897,000
53. Answer is (B).

Cost Retail
Purchases 4,000,000 6,200,000
Markup (5,000 x P100) 500,000
Markup cancelation (1,000 x P100) (100,000)
Goods available - conservative 60% 4,560,000 7,600,000
Markdowns (reduction in retail price) (200,000)
Goods available – average 62% 4,560,000 7,400,000
Net sales (5,400,000)
Conservative cost (60% x 2,000,000) 1,200,000
Average cost (62% x 2,000,000) 1,240,000
54. Answer is (B).

Cost Retail
Net purchases 3,725,000 4,950,000
Departmental transfer - credit (200,000) ( 300,000)
Net markup 150,000
Markdown (500,000-400,000) . ( 100,000)
Goods available for sale (75%) 5,175,000 6,900,000
Sales (4,000,000)
Inventory shortage - sales price ( 100,000)
Employee discounts ( 200,000)
Average cost (2,600,000 x 75%) 1,950,000
55. Answer is (C).

Cost Retail
Net markups 400,000
Net markdowns . ( 600,000)
Cost ratio (6,000/9,000) 66 2/3%
Sales (7,800,000)


Average cost (1,200,000 x 66 2/3%) 800,000

Ending inventory (800,000)
Cost of sales 5,200,000
56. Answer is (D).

Cost Retail
Finished goods-January 1 (60% x 240,000) 144,000 240,000
Cost of goods manufactured (squeeze) 1,200,000 2,000,000
Finished goods - December 31 (60% x 840,000) ( 504,000) ( 840,000)
Cost of goods sold 840,000 1,400,000
The amount of goods manufactured at retail is determined by simply working back.
Goods manufactured at cost 1,200,000
Cost ratio = Goods manufactured at retail = 2,000,000 = 60%
57. Answer is (D).

Cost Retail
Purchases 3,000,000 5,500,000
Net markups 500,000
Net markdowns . (1,000,000)
Net purchases 3,000,000 5,000,000
Cost ratio (3,000,000/5,000,000) 60%
Sales (4,500,000)
FIFO cost (2,000,000 x 60%) 1,200,000
58. Answer is (D).

Cost Retail
Inventory - January 1 80% 1,200,000 1,500,000
Purchases 4,200,000 5,900,000
Net markups 200,000
Net markdowns . ( 100,000)
Net purchases (4,200/6,000) 70% 4,200,000 6,000,000
Sales (5,500,000)
FIFO inventory- 12/31 (2,000,000 x 70%) 1,400,000 2,000,000

Increase (70% x 500,000) 350,000 500,000
LIFO inventory-12/31 1,550,000 2,000,000
59. Answer is (B).

Cost Retail
Inventory – January 1 1,200,000 1,800,000
Purchases 5,600,000 7,200,000
Freight-in 400,000
Net markup 1,400,000
Net markdown . (600,000)
Net purchases (6,000/8000) = 75% 6,000,000 8,000,000
Sales (7,600,000)
Inventory – December 31 2,200,000
FIFO cost (2,200,000 x 75%) 1,650,000

Less: inventory – December 31 1,650,000
60. Answer is (A).

Selling price 2,800,000
Production costs to complete (2,000,000)
Transport costs to customer (300,000)
Future selling costs (400,000)
Net realizable value 100,000
61. Answer is (C).

Estimated sales price 4,000,000
Cost to complete (1,200,000)
FIFO cost (lower than NRV) 2,600,000

62. Answer is (C).

Estimated sales price 8,000,000
Cost to complete - processing cost (2,400,000)
FIFO cost 5,200,000

Nee realizable value 5,600,000
LCNRV 5,200,000
The FIFO cost of P5,200,000 is the inventory valuation because it is lower than the net
realizable value.
63. Answer is (C).

Historical cost NRV Value
Markers 240,000 312,000 240,000
Pens 188,000 200,000 188,000
Highlighters 300,000 292,000 292,000
720,000
The measurement at the lower of cost or net realizable value shall be applied on an individual
basis or item by item.
64. Answer is (C).

Estimated selling price 4,050,000
Cost of disposal (200,000)
Net realizable value (lower than cost) 3,850,000
65. Answer is (A).

Cost NRV LCNRV
Skis 2,200,000 2,500,000 2,200,000
Boots 1,700,000 1,500,000 1,500,000
Ski equipment 700,000 800,000 700,000
Ski apparel 400,000 500,000 400,000
5,000,000 5,300,000 4,800,000
Inventories shall be measured at the lower of cost and net realizable value applied by
individual item.

66. Answer is (A).

Cost NRV Lower
Product X 1,500,000 1,400,000 1,400,000
Product Y 1,800,000 2,300,000 1,800,000
3,200,000
67. Answer is (A).

Inventories shall be measured at the lower of cost and net realizable value applied by
individual item. Net realizable value is the estimated selling price less the estimated cost to
complete and the estimated cost of disposal.
Product X Product Y
Materials and conversion costs 1,500,000 1,800,000
Selling price 2,000,000 3,000,000
Selling costs ( 600,000) ( 700,000)
Net realizable value 1,400,000 2,300,000
Measurement at lower amount 1,400,000 1,800,000
68. Answer is (A).

Cost NRV Lower
Sofas 100,000 102,000 100,000
Dining tables 100,000 90,000 90,000
Beds 450,000 480,000 450,000
Closets 300,000 308,000 300,000
Lounge chairs 125,000 100,000 100,000
Total 1,040,000
69. Answer is (C).

Cost NRV LCNRV
Product 1 800,000 550,000 550,000
Product 2 1,000,000 1,100,000 1,000,000
Product 3 700,000 950,000 700,000
Product 4 500,000 350,000 350,000
2,600,000
Note that under LCNRV, replacement cost and normal profit are not taken into consideration.
Total cost 3,000,000
LCNRV 2,600,000
Required allowance for inventory writedown 400,000
Allowance before adjustment (150,000)
Increase in allowance 250,000

Loss inventory writedown 250,000

Allowance for inventory writedown 250,000
70. Answer is (B).

Inventory - January 1, at cost 3,000,000
Inventory - December 31, at cost (4,000,000)
Cost of goods sold before inventory writedown 7,000,000
Loss on inventory writedown 100,000
Cost of goods sold after inventory writedown 7,100,000
Required allowance - December 31 (4,000,000 - 3,700,000) 300,000
Allowance for inventory writedown - January 1 (3,000,000-2,800,000) 200,000
The amount of any inventory writedown to net realizable value and all losses on inventory
shall be included in cost of goods sold. The amount of any reversal of inventory writedown
shall be deducted from cost of goods sold.
71. Answer is (C).

Physical inventory 2,000,000
Inventory writedown 300,000
Cost of goods sold per book 4,600,000

Cost of goods incorrectly recorded as sold (100,000)
Inventory losses 120,000
Adjusted cost of goods sold 4,920,000
72. Answer is (B).

September 30 (40,000 x 75) 3,000,000
December 31(10,000 x 80) 800,000
FIFO cost 3,800,000
Net realizable value (50,000 x 72) 3,600,000
Inventory writedown 200,000
Inventory - January 1 at cost 1,200,000
Purchases 9,300,000
Purchase discount ( 400,000)

Inventory - December 31 at cost ( 3,800,000)

Cost of goods sold before inventory writedown 6,300,000
Cost of goods sold after inventory Writedown 6,500,000
73. Answer is (A).

2014 Loss on inventory writedown 600,000
Allowance for inventory writedown 600,000
2015 Allowance for inventory writedown 200,000

Gain on reversal of inventory writedown (600,000-400,000) 200,000
74. Answer is (C).

(a) (b) (c)
Units Unit cost NRV
Category 1:
A 25,000 105 115
B 20,000 85 80
Category 2:
C 40,000 50 40
D 30,000 65 60
(a x b) (a x c)
Total cost NRV LCNRV
Category 1:
A 2,625,000 2,875,000 2,625,000
B 1,700,000 1,600,000 1,600,000
Subtotal 4,325,000 4,475,000
Category 2:
C 2,000,000 1,600,000 1,600,000
D 1,950,000 1,800,000 1,800,000
Subtotal 3,950,000 3,400,000 .
Grand total 8,275,000 7,875,000 7,625,000
LCNRV - by individual item 7,625,000

75. Answer is (B). LCNRV - by category

Total cost NRV Lower
Category 1 4,325,000 4,475,000 4,325,000
Category 2 3,950,000 3,400,000 3,400,000
7,725,000
76. Answer is (B).

Total cost 8,275,000
Total NRV 7,875,000
LCNRV - by total 7,875,000
77. Answer is (B).

Market value - December 31, 2014 5,000,000
Market value - March 31, 2015 4,900,000
Additional loss on purchase commitment in 2015 100,000
78. Answer is (B). Loss on purchase commitment (50,000 x 3) 150,000
79. Answer is (A).

Remaining contract -1,000 units each year
2015 (1,000 x P100) 100,000
2016 (1,000 x P100) 100,000
Total 200,000
Estimated realizable value (2,000 x P20) 40,000
Loss on purchase commitment 160,000
A loss on inventory write-down should also be recognized on December 31,2014 in the
amount of P200,000 (2,500" units x P80).
80. Answer is (C).

Estimated liability for purchase commitment on 12/31/2014(10,000x40) 400,000
Entry on February 15, 2015
Purchases (10,000x300) 3,000,000
Estimated liability for purchase commitment 400,000
Accounts payable (10,000 x 310) 3,100,000
Gain on purchase commitment 300,000
81. Answer is (C).

Estimated liability for purchase commitment on 12/31/2014 (100,000x15) 1,500,000
To record the actual purchase on March 31,2015:

Purchases (100,000x55) 5,500,000

Estimated liability for purchase commitment 1,500,000
Accounts payable 5,500,000
Gain on purchase commitment 1,500,000
The gain to be recognized is limited to the loss on purchase commitment previously recorded.
82. Answer is (B). Fair value measurement stops at the point of harvest and PAS 2 on inventory
applies after such date. Accordingly, the coffee beans inventory shall be measured at the
lower of cost and net realizable value on December 31, 2015. The fair value less cost of
disposal of P3,500,000 at the point of harvest is the initial cost of coffee beans inventory for
purposes of applying PAS 2. The net realizable value of P3,200,000 is the measurement on
December 31,2015 because this is lower than the deemed cost of P3,500,000.
83. Answer is (A). Only the freestanding trees shall be classified as biological assets. The land
under trees and roads in forests shall be included in property, plant and equipment.
84. Answer is (B).

Purchase price 5,000,000
Change in fair value due to growth & price changes 350,000
Decrease in fair value due to harvest (50,000)
Carrying cost 5,300,000
85. Answer is (B).

Carrying amount - January 1 5,000,000
Increase due to purchases 2,000,000
Gain from change in fair value due to price change 400,000
Gain from change in fair value due to physical change 600,000
Decrease due to sales (850,000)
Decrease due to harvest ( 200,000)
Carrying amount - December 31 6,950,000
86. Answer is (B).

Acquisition cost - December 31, 2014 .600,000
Increase in fair value on initial recognition 700,000
Change in fair value in 2015 100,000
Decrease in fair value due to harvest ( 90,000)
Carrying amount - December 31, 2015 1,310,000

87. Answer is (A).

Change in fair value in 2015 100,000
Net gain from change in fair value in 2015 10,000
88. Answer is (B).

Value of biological asset at acquisition cost on December 31, 2014 6,000,000
Fair valuation surplus on initial recognition at fair value on December 31, 2014 500,000
Carrying amount – December 31, 2015 7,300,000
89. Answer is (A).

Net gain from the change in fair value 800,000
90. Answer is (A).

Change in fair value due to growth and price changes 2,500,000
Decrease in fair value due to harvest ( 250,000)
Net gain from biological asset 2,250,000
91. Answer is (C).

Inventory 400,000
Gain on agricultural produce 400,000
92. Answer is (A).

Change in fair value due to growth and price change 400,000
Net gain on biological asset 350,000
93. Answer is (B).

Milk harvested during the year but not yet sold 150,000
94. Answer is (B).

Fair value of milk produced 600,000
Gain from change in fair value 50,000
Total income 650,000
Inventories used (140,000)

Staff costs (120,000)

Depreciation expense ( 15,000)
Other operating expenses (190,000)
Income before income tax 185,000
Income tax expense (55,000)
Net income 130,000
95. Answer is (B).

Dairy livestock - immature 50,000
Dairy livestock - mature 400,000
Fair value of biological assets 450,000
96. Answer is (C).

Fair value of 3-year old animals on Dec. 31 (11 x P120) 1,320
Fair value of 0.5-year old animal on Dec. 31, the newborn (1 x P80) 80
Total fair value - December 31,2014 1,400
97. Answer is (B).

Fair value of 10 animals on January 1 (10 x P100) 1,000
Acquisition cost of one animal on July 1 108
Total carrying amount of biological assets - December 31 1,108
Fair value on December 31,2014 1,400
Carrying amount 1,108
Gain from change in fair value 292
98. Answer is (A).

Gain from change in fair value due to price change:
10 2-year old animals (105-100 = 5x10) 50
1 2.5-year old animal (111-108 = 3 x 1) 3
1 newborn on July 1 (72 - 70 = 2 x 1) 2
Total 55
Gain from change in fair value due to physical change:

10 3-year old animals acquired 1/1/2014 (120-105 = 15 x 10) 150
1 3-year old animal acquired 7/1/2014 (120-111 = 9 x 1) 9
1 0.5-year old born on 7/1/2014 (80-72 = 8 x 1) 8
1 newborn (70 x 1) 70
Total 237
Price change 55

Physical change 237

Total gain from change in fair value 292
99. Answer is (D).

15 Horses (2 years old) 1,350,000
4 Dairy cattle (1.5 years old) 200,000
6 Carabaos (1 year old) 140,000
Carrying amount – December 31 3,160,000
100. Answer is (C).

Fair value – December 31, (same age) 2,800,000
Carrying amount (2,100,000 + 250,000) 2,350,000
Price change 450,000
101. Answer is (A).

Fair value – December 31 (different age) 3,160,000
Fair value – December 31 (same age) 2,800,000
Physical change 360,000
102. Answer is (C).

Cows which are 2 years old on 1/1/2014 (2,100 x 4,000) 8,400,000
Heifers purchased which are 1 year old on 1/1/2014 (300x3,000) 900,000
Total fair value - January 1, 2014 9,300,000
103. Answer is (A).

Heifers purchased which are 1 year old on July 1, 2014 (750 x 3,000) 2,250,000
104. Answer is (B).

Cows which are 3 years old on 12/31/2014 (2,100x5,000) 10,500,000
Heifers which are 2 years old on 12/31/2014 ( 300x4,500) 1,350,000
Heifers which are 1.5 years old on 12/31/2014 ( 750x3,600) 2,700,000
Total fair value - December 31, 2014 14,550,000
105. Answer is (A).

Fair value - December 31, 2014 14,550,000
Fair value - January 1, 2014 (9,300,000)

Fair value - July 1, 2014 (2,250,000)

Increase in fair value 3,000,000
106. Answer is (C).

Increase due to price change:
2,100 x (4,500-4,000) 1,050,000
300 x (3,200-3,000) 60,000
750 x (3,200-3,000) 150,000 1,260,000
Increase due to physical change:
2,100 x (5,000-4,500) 1,050,000
300 x (4,500-3,200) 390,000
750 x (3,600-3,200) 300,000 1,740,000
Total increase in fair value 3,000,000

F1

Загружено:

Сведения о документе

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

F1

Загружено:

Авторское право:

Доступные форматы

FINANCIAL ACCOUNTING

THEORY & PRACTICE

Inventory Estimation Methods

1. Determination of inventory loss due to fire and other catastrophe or theft of

3. Preparation of interim statements or statements of less than one year. Interim

Gross profit method

Retail inventory method

The ending inventory is computed as follows:

Essay Questions: Inventory – Cost Estimation Page 4

4. What are the four applications of the retail inventory method?

1. Conservative approach - The cost ratio is determined by including markups and

An average percentage for each retail department is often used.

6. Define the following:

Essay Questions: Inventory – Cost Estimation Page 5

1. What is the scope of PAS 41 on "agriculture"?

2. Define biological assets, agricultural produce and harvest.

Biological assets are "living animals and living plants".

Agricultural produce is the harvested product of the entity's biological assets.

Essay Questions: Biological Assets Page 6

Biological asset Agricultural Product

4. Define agricultural activity and biological transformation.

Agricultural activity or simply "agriculture" is the management by an entity of the biological

Biological transformation comprises the processes of growth, degeneration, production and

5. Give examples of agricultural activity.

Agricultural activity covers a diverse range of activities such as the following:

Essay Questions: Biological Assets Page 7

5. Aquaculture, including fish farming

6. What are the common features of agricultural activity?

The common features of agricultural activity are as follows:

Such management distinguishes agricultural activity from other activities.

7. Give examples of biological transformation.

Essay Questions: Biological Assets Page 8

3. The fair value or cost of the asset can be measured reliably.

9. Explain the measurement of biological asset and agricultural produce.

10. What is the meaning of "cost of disposal"?

11. Explain the fair value measurement of biological asset.

12. Explain the fair value measurement of agricultural produce.

Essay Questions: Biological Assets Page 9

Essay Questions: Biological Assets Page 10

15. Is agricultural land a biological asset?

17. Explain the treatment of a government grant related to:

1. Biological asset measured at fair value less cost of disposal.

Essay Questions: Biological Assets Page 11

becomes receivable. If a government grant related to a biological asset measured at fan

2. If a government grant relates to a biological asset measured at cost less any

Essay Questions: Biological Assets Page 12

MCQ – Theory: Inventories – Cost Estimation

3. How is the gross profit method used in relation to inventory valuation?

5. Which would not require an estimate of inventory?

MCQ – Theories: Inventory – Cost Estimation Page 13

7. The gross profit method of inventory valuation is not valid when

8. The gross profit method of inventory valuation is invalid when

Retail inventory method

MCQ – Theories: Inventory – Cost Estimation Page 14

13 A major advantage of the retail inventory method is that it

Average retail inventory method

MCQ – Theories: Inventory – Cost Estimation Page 15

Conventional retail inventory method

MCQ – Theories: Inventory – Cost Estimation Page 16

MCQ – Theory: Biological Assets

29. Which of the following is not dealt with by PAS 41?

MCQ – Theories: Biological Assets Page 17

31. Agricultural activity includes all of the following, except

32. Agricultural activity results in which of the following type of asset?

1. Determination of inventory loss due to fire and other  catastrophe or theft of

3. Preparation of interim statements or statements of less than  one year. Interim

3. The fair value or cost of the asset can be measured  reliably.

1. Biological asset measured at fair value less cost of  disposal.

2. If a government grant relates to a biological asset  measured at cost less any

50. Which of the following would be classified as agricultural  produce?