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Chapter 8
Inventory Estimation

NAME: Date:
Professor: Section: Score:

QUIZ:

1. On October 1, 20x1, the warehouse of ABC Co. and all inventories contained therein were
damaged by flood. Off-site back up of data base shows the following information:

Inventory, Jan. 1 10,000

Accounts payable, Jan. 1 3,000
Accounts payable, Sept. 30 2,000
Payments to suppliers 50,000
Freight-in 500
Purchase returns 500
Sales from Jan. to Sept. 80,000
Sales returns 5,000
Sales discounts 2,000
Gross profit rate based on sales 30%

Additional information:
Goods in transit as of October 1, 20x1 amounted to ₱1,000, cost of goods out on consignment is
₱1,200, and materials damaged by flood can be sold at a salvage value of ₱1,800. How much is the
inventory loss due to the flood?
a. 3,000 c. 4,400
b. 2,500 d. 4,900

2. On October 1, 20x1, the warehouse of ABC Co. and all inventories contained therein were razed
by fire. Off-site back up of data base shows the following information:
Inventory, Jan. 1 20,000
Net purchases 190,000
Net sales from Jan. to Sept. 240,000
Gross profit rate based on cost 25%

Twenty percent of the inventory contained in the warehouse has been salvaged from the fire while
half is partially damaged and can be sold as scrap at thirty percent of its cost. How much is the
inventory loss due to the fire?
a. 18,000 c. 9,000
b. 5,400 d. 11,700
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Use the following information for the next two questions:

Presented below is information pertaining to ABC Co.:
Cost Retail
Inventory, January 1 21,750 35,000
Purchases 138,250 200,750
Freight-In 5,000 -
Purchase discounts 1,250 -
Purchase returns 13,000 21,500
Departmental Transfers-In (Debit) 2,500 3,750
Departmental Transfers-Out (Credit) 2,000 3,000
Markups 15,000
Markup cancellations 5,000
Markdowns 30,000
Markdown cancellations 7,500
Abnormal spoilage (theft and casualty
12,500
loss) 17,500
Sales 109,500
Sales returns 6,250
Sales discounts 2,500
Employee discounts 1,250
Normal spoilage (shrinkage and breakages) 500

3. How much is the ending inventory under the Average cost method?
a. 60,750
b. 60,000
c. 61,050
d. 62,400

4. How much is the ending inventory under the FIFO cost method?
a. 60,750
b. 60,000
c. 61,050
d. 62,400

“Blessed is the one who perseveres under trial because, having stood the test, that person will receive the
crown of life that the Lord has promised to those who love him.” (James 1:12)
- END -
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SOLUTIONS:
1. A
Solution:
Accounts payable
3,000 Beginning balance
Payments to suppliers 50,000 49,000 Net purchases (squeeze)
Ending balance 2,000

The computed “Gross purchases” is extended to the “Inventory” T-account as follows:

Inventory
Beginning balance 10,000
Net purchases 49,000
Freight-in 500 52,500 Cost of goods sold *
7,000 End. bal. (squeeze)

*“Cost of goods sold” is computed as follows:

Gross sales 80,000
Sales returns (5,000)
Net sales 75,000
Multiply by: Cost ratio (100% - 20% GPR based on sales) 70%
Cost of goods sold 52,500

Inventory, Sept. 30 (see T-account above) 7,000

Goods in transit (1,000)
Goods out on consignment (1,200)
Salvage value (1,800)
Inventory loss due to flood 3,000

2. D
Solution:
  Inventory  
Jan. 1 20,000  
Net purchases 190,000 192,000 COGS (240K x 100/125)
  18,000 Sept. 30 (squeeze)
       
Inventory, Sept. 30 18,000
Salvaged (20% x 18,000) (3,600)
Partially damaged (50% x 18,000 x 30%) (2,700)
Loss from fire 11,700
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3. B
Solution:
Cost Retail
Inventory, January 1 21,750 35,000
Net purchases (a) 129,000 179,250
Departmental transfers-in (debit) 2,500 3,750
Departmental transfers-out (credit) (2,000) (3,000)
Net markups (15,000 – 5,000) 10,000
Net markdowns (30,000 – 7,500) (22,500)
Abnormal spoilage (theft and casualty loss) (12,500) (17,500)
Total goods available for sale 138,750 185,000
Net sales (b) (105,000)
Ending inventory at retail 80,000

(a)
Cost Retail
Purchases 138,250 200,750
Freight-In 5,000 -
Purchase discounts (1,250) -
Purchase returns (13,000) (21,500)
Net purchases 129,000 179,250

The Average cost ratio is computed as follows:

Cost ratio Total goods avail. for sale at cost
= Total goods avail. for sale at sales price or
(Average cost method)
at retail

Average cost ratio = (138,750 ÷ 185,000) = 75%

(b) Net sales is computed as follows:

Sales 109,500
Sales returns (6,250)
Employee
1,250
discounts
Normal spoilage 500
Net sales 105,000

The ending inventory at cost is estimated under the Average cost method as follows:
Ending inventory at retail (or at selling price) 80,000
Multiply by: Average cost ratio 75%
Ending inventory at cost 60,000
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4. D
Solution:
Based on the solutions from the previous problem, the cost ratio under the FIFO cost method is computed
as follows:
(d) The FIFO cost ratio is computed as follows:
Cost ratio TGAS at cost less beg. inventory at cost
=
(FIFO cost method) TGAS at retail less beg. inventory at retail
FIFO cost ratio = [(138,750 – 21,750) ÷ (185,000 – 35,000)]
= 78%

The ending inventory at cost is estimated under the FIFO cost method as follows:
Ending inventory at retail 80,000
Multiply by: FIFO cost ratio 78%
Ending inventory at cost 62,400