Inventories

1. Lisa Co. has incurred the following costs in connection with its purchase of inventory:
Purchase price based on vendor’s invoices 1,250,000.00
Trade discounts on purchases already
125,000.00
deducted from vendor’s invoices
Salaries of accounting department 150,000.00
Brokerage commission paid to agents for
50,000.00
arranging imports
Sales commission paid to sales agents 75,000.00
After-sales warranty costs 62,500.00
Import duties 100,000.00
Freight and insurance on purchases 250,000.00
Other handling costs relating to imports 25,000.00

What is the total cost of the purchases?

a. 1,425,000
b. 1,550,000
c. 1,675,000
d. 1,625,000

Use information for question 2-6:

The Potters Inc. reported income before taxes of P 1,000,000 for 2018 and P 1,200,000 for 2019.
The company takes its annual physical count of inventory every December 31. Your audit
revealed the following information:
a. The price used for 4,000 units included in the 2018 ending inventory was P129. The correct
cost was P119.
b. Goods costing P 70,000 was received from a vendor on January 5, 2019. The shipment was
made on December 26, 2018 under FOB shipping point term. The purchase was recorded in
2018 but the shipment was not included in the 2018 ending inventory.
c. Merchandise costing P 100,000 was sold to customer on December 29, 2018. Potter was
asked by the customer to keep the merchandise until January 3, 2019, when the customer
would come and pick it up. Although the sale was properly recorded in 2018, the
merchandise was included in the ending inventory.
d. A supplier sold merchandise valued at P 140,000 to Potter Inc. The merchandise was
shipped FOB shipping point on December 29, 2019, and was received by Potter on
December 31, 2019. The purchase was recorded in 2019 and the merchandise was not
included in the 2019 ending inventory.
2. The December 31, 2018 inventory is over or understated by:
a. 40,000 over
b. 70,000 under
c. 70,000 over
d. 100,000 over
3. The December 31, 2019 inventory is over (understated) by:
a. NIL
b. 140,000 under
c. 110,000 under
d. 30,000 under
4. The corrected net income for 2018 is:
a. 1,310,000
b. 1,370,000
c. 1,410,000
d. 1,140,000
5. The corrected net income for 2019 is:
a. 1,310,000
b. 1,370,000
c. 1,410,000
d. 1,440,000
6. If no correcting entries are made for the 2 years combined, by what amount did the total
income before taxes change?
a. NIL
b. 40,000 understated
c. 70,000 understated
d. 140,000 understated