PROBLEMS_INVENTORY ESTIMATION : GROSS PROFIT METHOD

1. Panama Company has a recent profit history of 40% of net sales.

The following data are available from the accounting records for the three months ended
March 31.

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?

ANSWER
650,000
3,200,000
50,000
(75,000) 3,175,000
CGAFS 3,825,000
COGS
4,500,000 X 60% (2,700,000)
Ending inventory 1,125,000

2. Nicaragua Company provided the following information for the current year:

Beginning inventory 650,000

Purchases 2,300,000
Purchase returns 80,000
Freight in 60,000
Sales 3,400,000
Sales discount 20,000
Sales returns 30,000

At year-end, a physical inventory revealed that the ending inventory was only P420,000. The
gross profit on sales has remained constant at 30%. The entity suspects that some inventory
may have been pilfered by one of the employees.

What is the estimated cost of missing inventory at year-end?

ANSWER
650,000
2,300,000
60,000
(80,000) 2,280,000
CGAFS 2,930,000
COGS
3,400,000
( 30,000)
3,370,000
 X 70 % 2,359,000
Ending inventory 1,571,000
vs Physical count 420,000
Est cost of missing
Inventory 151,000

*Sales discounts are not deducted from Sales

3. At year-end, Honduras Company experienced a storm surge which caused severe damage to
the entire inventory. Based on recent history, the entity has a gross profit of 25% on sales.

The following information is available for the current year:

Beginning inventory 520,000
Purchases 4,120,000
Purchase returns 60,000
Sales 5,600,000
Sales returns 400,000
Sales allowances 100,000

What is the estimated cost of goods sold for the current year?

ANSWER

5,600,000
(400,000)
5,200,000
X 75 %
COGS 3,900,000

4. On September 30, a fire at Guatemala 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
goods sold. A physical inventory disclosed usable damaged goods which can be sold to a jobber
for P 100,000. The following information is available from the records for the nine months
ended September 30.
Inventory January 1 1,100,000
Purchases 6,000,000
Net sales 7,280,000

What is the estimated amount for fire loss?

CGAFS (1,100,000 + 6,000,000) 7,100,000

COGS
7,280,000 / 130 % 5,600,000
Ending inventory 1,500,000
NRV of damaged goods ( 100,000)
Fire loss 1,400,000

5. El Salvador Company reported the following information for the current year.
Beginning inventory 5,000,000
Purchases 26,000,000
Freight in 2,000,000
Purchase returns and allowance 3,500,000
Purchase discount 1,500,000
Sales 40,000,000
Sales returns 3,000,000
Sales allowances 500,000
Sales discounts 1,000,000

A physical inventory taken at year- end resulted in an ending inventory costing P4,000,000.
At yearend unsold good out on consignment with selling price of P1,000,000 are in the hands of
consignee. The gross profit was 40% on sales.

5-1 What is the cost of goods available for sale?

ANSWER
5,000,000
26,000,000
2,000,000
( 3,500,000 )
( 1,500,000 ) 23,000,000
CGAFS 28,000,000

5-2 What is the cost of goods sold?

ANSWER
40,000,000
( 3,000,000 )
37,000,000
X 60 %
COGS 22,200,000

5-3 What is the estimated cost of inventory shortage?

ANSWER
CGAFS 28,000,000
COGS 22,200,000
Ending inventory 5,800,000
Vs physical count 4,000,000
Difference 1,800,000
Less : cost of goods
Out on consignment
1,000,000 x 60 % 600,000  not included in count
Inventory shortage 1,200,000

6. On December 31,2020, a big fire caused severe damage to the warehouse of Costa Rica
Company.

2020 2019
Beginning inventory 1,000,000 -
Purchase 8,000,000 5,600,000
Purchase return 500,000 100,000
Sales 9,000,000 6,000,000

At the beginning of 2020, 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 2019.
Undamaged merchandise marked to sell at P500,000 was salvaged. Damaged merchandise
marked to sell at P100,000 had an estimated realize value of P10,000.

What amount should be reported as inventory fire loss?

ANSWER
2019
CGAFS ( 0 + 5,600,000 – 100,000) 5,500,000
Ending inventory 1,000,000  beginning inventory of 2020
COGS 4,500,000

Sales 6,000,000
Less COGS 4,500,000
Gross profit 1,500,000

GP rate on sales : 1,500,000 / 6,000,000 = 25 %

+ 5%
GP rate to be used in 2020 30 %

2020
CGAFS (1,000,000 + 8,000,000 – 500,000) 8,500,000
COGS (9,000,000 x 70 %) 6,300,000
Ending inventory 2,200,000
Less : cost of undamaged merchandise
500,000 x 70 % ( 350,000)
NRV of damaged merchandise ( 10,000)
Inventory fire loss 1,840,000

7. Belize Company began operations at the beginning of current year. The following information
is available for the current year.
Total merchandise purchase 7,000,000
Ending inventory 1,400,000
Collections from customers 4,000,000

All merchandise is marked to sell at 40% above cost. All sales are credit sales and all accounts
are collectible.

What is the balance of accounts receivable at yearend?

ANSWER
CGAFS ( 0 + 7,000,000) 7,000,000
 Ending inventory 1,400,000
COGS 5,600,000
X 140 %
Sales 7,840,000
Less collections 4,000,000
AR ending 3,840,000

8. On September 30, 2020, a fire destroyed most of the merchandise inventory of Cuba
Company. All goods were completely destroyed except for partially damaged goods that
normally sell for P100,000 and that had an estimate net realizable value of P25,000 and
undamaged goods that normally sell for P60,000.

Inventory January 1,2020 660,000

Net purchases, January 1 through September 30,2020 4,240,000
Net sales, January 1 through September 30,2020 5,600,000

2019 2018 2017

Net sales 5,000,000 3,000,000 1,000,000
Cost of goods sold 3,840,000 2,200,000 710,000

What is the amount of fire loss to be recognized on September 30,2020?

Historical :
Net sales (2017 to 2019) 9,000,000
COGS (2017 to 2019) 6,750,000 75 %  cost ratio
Gross profit 2,250,000 25 %  GP rate

Beginning inventory 660,000

Net purchases 4,240,000
Cost of goods AFS 4,900,000
Less : COGS
5,600,000 x 75 % 4,200,000
Ending inventory 700,000
Less :
Undamaged goods
60,000 x 75 % ( 45,000)
NRV of damaged goods ( 25,000)
Fire loss 630,000

9. Anguilla Company provided the following information.

2019 2020
Sales 7,500,000 4,500,000
Beginning inventory 1,260,000 ?
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 ?

What is the inventory on December 31, 2020?

2019 :
Beginning inventory 1,260,000
Net purchases (6,450,000 + 350,000 – 90,000 – 120,000 – 20,000) 6,570,000
Cost of goods AFS 7,830,000
Less : ending inventory 2,355,000
COGS 5,475,000

Sales 7,500,000
COGS 5,475,000 73 %  cost ratio
Gross profit 2,025,000 27%  GP rate

2020

Beginning inventory 2,355,000

Net purchases (3,180,000 + 220,000 – 45,000 – 40,000 – 15,000) 3,300,000
Cost of goods AFS 5,655,000
Less : COGS ( 4,500,000 x 73 % ) 3,285,000
Ending inventory 2,370,000

10. In December 2020 Antigua and Barbuda Company has a significant portion of inventory
stolen.

The entity determined the cost of inventory not stolen to be P100,000.

2020 2019
Purchases 5,200,000 5,000,000
Purchase returns 240,000 200,000
Sales 7,880,000 8,200,000
Sales returns and allowances 80,000 200,000
Beginning inventory 1,200,000 2,000,000

What is the estimated cost of the stolen inventory?

2019 :
Net sales (8,200,000 – 200,000) 8,000,000
COGS
Beginning inventory 2,000,000
Net purchases (5,000,000 – 200,000) 4,800,000
Cost of goods AFS 6,800,000
Less : ending inventory 1,200,000 5,600,000  cost ratio 70 %
Gross profit 2,400,000  GP rate 30 %

2020
Beginning inventory 1,200,000
Net purchases (5,200,000 – 240,000) 4,960,000
 Cost of goods AFS 6,160,000
Less : COGS
Net sales (7,880,000 – 80,000) 7,800,000
X cost ratio 70 % 5,460,000
Ending inventory 700,000
Less : not stolen (100,000)
Stolen inventory 600,000

11. Aruba Company sold merchandise on a consignment basis to dealers. The gross profit was
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 was the gross profit on consignment sales?

Sales 9,600,000
COGS
9,600,000 / 125 % 7,680,000
Gross profit 1,920,000

12. On December 31, 2020, a fire broke out in the warehouse of Bahamas Company destroying
all inventory. The following data are available for the current year:

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

2019 2018 2017

Sales 2,800,000 2,700,000 2,500,000
Gross profit 1,260,000 1,080,000 860,000

12-1 What is the amount of purchase for the current year?

Accounts Payable

Beginning 400,000
 Purchase
Payments 1,600,000 s 1,700,000

Ending 500,000

12-2 What is the amount of sales for the current year?

Accounts Receivable
Beginning 480,000

2,600,00 Collectio 2,640,00

Credit Sales 0 n 0

Ending 440,000

12-3 What is the inventory fire loss on December 31,2020?

GP rate :
GP 2017 to 2019 3,200,000
Divide by
Sales 2017 to 2019 8,000,000
GP rate 40 %

Beginning inventory 500,000

Purchases 1,700,000
Cost of goods AFS 2,200,000
Less : COGS
Sales x cost ratio
2,600,000 x 60 % 1,560,000
Ending inventory 640,000
Less : goods out on consignment
200,000 x 60 % (120,000)
SV of inventory damaged ( 20,000)
Inventory fire loss 500,000

13. At year- end, Barbados 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 4,500,000 6,000,000
Gods in process 0 4,300,000
Raw materials 2,000,000 1,700,000
Factory supplies 400,000 500,000

During the year, the entity reported sales P 20,000,000, purchases P 3,800,000, freight
P200,000, direct labor P5,000,000 and manufacturing overhead at 60% of direct labor. The
average gross profit rate is 30% on sales.

13-1 What is the cost of raw materials used? 3,700,000

13-2 What is the total manufacturing cost? 11,700,000

13-3 What is the cost of goods sold? 14,000,000

13-4 What is the cost of goods in process inventory destroyed by fire?

Direct materials used

Raw materials inventory beginning 1,700,000
Raw materials purchases 3,800,000
Freight in 200,000 4,000,000
Available for use 5,700,000
Less : Raw materials, ending 2,000,000 3,700,000
Direct labor 5,000,000
Manufacturing overhead (5,000,000 x 60 %) 3,000,000
Total manufacturing cost 11,700,000
+ Goods in process beginning 4,300,000
Cost of goods placed in process 16,000,000
-Good in process ending 3,500,000 destroyed by fire
Cost of goods manufactured 12,500,000
+ Finished goods beginning 6,000,000
Cost of goods AFS 18,500,000
-Finished goods ending 4,500,000
COGS 14,000,000 work back / upwards
Sales x cost ratio to get goods in process
20,000,000 x 70 % ending

14. In conducting an audit of Cayman Company for the year ended June 30,2020, the CPA
observed the physical inventory at an interim date, May 31,2020, instead of at year end.

The following information was obtained from the general ledger.

Inventory, July 1,2019 875,000
Physical inventory, May 31,2020 950,000
Sales for 11 months ended May 31,2020 8,400,000
Sales f r year ended June 30,2020 9,600,000
Purchases for 11 months ended May 31,2020 before audit adjustments 6,750,000
Purchase for year ended June 30 , 2020 8,000,000

a. Shipments received in May and included in the physical inventory

but recorded as June purchase 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 31,2020 10,000
Total at June 30,2020, including the May 30, 2020
unrecorded chargebacks 15,000

c. Deposit made with vendor and charged to purchases in April 2020.

The product was shipped in July 2020. 20,000

d. Deposit made with vendor and charged to purchases in May 2020.

Product was shipped FOB destination, on May 29,2020 and
was included in May 31,2020 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

14-1 What is the amount of gross profit for the eleven months ended May 31,2020?
1,680,000
14-2 What is the amount of sales for the month of June?
1,200,000
14-3 What is the cost of goods sold for the month of June?
980,000
14-3 What is the inventory on June 30,2020?
1,140,000

Inventory 5/31/2020 Purchases 11 months Purchases for the year

ended 5/31/2020 ended 6/30/2020
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)
E
Adjusted 895,000 6,740,000 7,965,000

(1) Inventory 7/1/2019 875,000

Purchases 7/1/2019 to 5/31/2020
As adjusted 6,740,000
Cost of goods AFS 7,615,000
- Inventory 5/31/2020 895,000
COGS 7/1/2019 to 5/31/2020 6,720,000

Sales 7/1/2019 to 5/31/2020 8,400,000

-COGS 7/1/2019 to 5/31/2020 6,720,000 80%
Gross profit 1,680,000 20%
(2)
Sales 12 months 7/1/2019 to 6/30/2019 9,600,000
-Sales 11 months 7/1/2019 to 5/31/2020 8,400,000
Sales in June 2020 1,200,000

(3)
Sales in June 1,200,000  with profit 1,100,000
 Without profit 100,000

With profit without profit

Sales 1,100,000 100,000
COGS 80% 880,000 + 100,000 = 980,000 total COGS

(4)
Inventory 7/1/2019 875,000
+ Purchases 12 months adjusted 7,965,000
Cost of goods AFS 8,840,000
-COGS
7/1/2019 to 5/31/2020 6,720,000
June 2020 980,000 7,700,000
Inventory 6/30/2020 1,140,000

15. On April 30,2020, a fire damaged the office of Dominica Company.

The following balances were gathered from the general ledger on March 31,2020:
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:

Accounts payable as of March 31 240,000

April merchandise shipments 80,000
Expenses 160,000

Payments for shipments prior to April  240,000

Payment for April shipment  80,000

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.

Collection : 440,000 – 20,000 = 420,000

20,000  purchase return

 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.
AR, end  1,040,000
Written off  60,000

 Correspondence with suppliers revealed unrecorded obligations at April 30 of P340,000 for

April merchandise shipmen, including P100,000 for shipments in transit on that date.
AP, end  340,000

 The average gross profit rate is 40%.

Cost ratio  60 %
 Inventory with a cost of P260,000 was salvaged and sold for P140,000. The balance of the
inventory was a total loss.

15-1 What is the total amount of sales up to April 30?

4,200,000
15-2 What is the total amount of purchase up to April 30?
2,100,000
15-3 What is the inventory on April 30?
1,440,000
15-4 What is the fire loss to be recognized on April 30?
1,200,000

(1)

Accounts receivable
3/31/2020 920,000

writeoff 60,000
Sales in 600,000
April collection 420,000

4/30/2020 1,040,000

Total sales
Up to March 31, 2020 3,600,000
April 2020 600,000
Total 4,200,000

(2)
Accounts payable as of 4/30/2020 for April purchases 340,000
Add back : Payments for April purchases 80,000
Purchases in April 420,000
Plus Purchases up to March 1,680,000
Purchases up to April 2,100,000
(3)
Inventory, January 1 1,880,000
Purchases 2,100,000
Purchase returns 20,000 2,080,000
Cost of goods AFS 3,960,000
-COGS
4,200,000 x 60 % 2,520,000
Inventory, April 30 1,440,000
-Goods in transit (100,000)
-Salvage value of damaged goods (140,000)
Fire loss 1,200,000 (4)