Since 1977

FAR OCAMPO/OCAMPO
FAR.2903-Estimating Inventories

DISCUSSION PROBLEMS
1. Techniques for the measurement of the cost of 6. The Bayambang Corporation was organized on January
inventories may be used for convenience if the results 1, 2019. On December 31, 2020, the corporation lost
approximate cost. The following are acceptable for most of its inventory in a warehouse fire just before
year-end financial reporting purposes, except the year-end count of inventory was to take place.
a. Standard cost method Data from the records disclosed the following:
b. Retail method 2019 2020
c. Gross profit method Goods available for sale 4,069,400 4,157,000
d. None of the above. Sales 3,940,000 4,180,000
Sales returns and
2. The gross profit method is useful allowances 80,000 100,000
a. When interim financial statements are prepared. Gross profit rate 21% ?
b. When inventory is destroyed by fire or flashfloods.
c. When testing of the validity of an inventory cost On January 1, 2020, the Corporation’s pricing policy
determined under either periodic or perpetual was changed so that the gross profit rate would be
system. three percentage points higher than the one earned in
d. In all of these. 2019.

3. The use of the gross profit method assumes Salvaged undamaged merchandise was marked to sell
a. The amount of gross profit is the same as in prior at P120,000 while damaged merchandise was marked
years. to sell at P80,000 had an estimated realizable value of
b. Sales and cost of goods sold have not changed P18,000.
from previous years.
How much is the inventory loss due to fire?
c. Inventory values have not increased from
a. P918,200 c. P856,200
previous years.
b. P947,000 d. P824,600
d. The relationship between gross profit and sales
remains stable over time.
7. Luna Manufacturing began operations 5 years ago. On
August 13, 2020, a fire broke out in the warehouse
4. The gross profit method assumes
destroying all inventory and many accounting records
a. The beginning inventory plus purchases equal total
relating to the inventory. The information available is
goods to be accounted for.
presented below. All sales and purchases are on
b. Goods not sold must be on hand.
account.
c. If sales, reduced to cost, are deducted from the
January 1, August 13,
sum of the opening inventory plus purchases, the
2020 2020
result is the ending inventory.
Inventory P143,850
d. All of these.
Accounts Receivable 130,590 P128,890
Accounts Payable 88,140 122,850
5. On May 6, 2020 a flash flood caused damage to the
Collections on accounts rec.,
merchandise stored in the warehouse of Cabanatuan
Jan. 1- Aug. 13 753,800
Co. You were asked to submit an estimate of the
Payments to suppliers,
merchandise destroyed in the warehouse. The
Jan. 1- Aug. 13 487,500
following data were established:
Goods out on consignment
a. Net sales for 2019 were P800,000, matched
at Aug. 13, at cost 52,900
against cost of P560,000.
b. Merchandise inventory, Jan. 1, 2020 was Summary on previous years’ sales:
P200,000, 90% of which was in the warehouse and 2017 2018 2019
10% in downtown showrooms. Sales P626,000 P705,000 P680,000
c. For Jan. 1, 2020 to date of flood, you ascertained Gross Profit 187,800 183,300 231,200
invoice value of purchases (all stored in the GPR 30% 26% 34%
warehouse), P100,000; freight inward, P4,000;
purchases returned, P6,000. Determine the inventory loss suffered as a result of the
d. Cost of merchandise transferred from the fire.
warehouse to show-rooms was P8,000, and net a. P139,590 c. P86,690
sales from January 1 to May 6, 2020 (all b. P102,560 d. P86,310
warehouse stock) were P320,000.
Assuming gross profit rate in 2020 to be the same as 8. The work-in-process inventory of Burp Company were
in the previous year, the estimated merchandise completely destroyed by fire on June 1, 2020. You
destroyed by the flood was were able to establish physical inventory figures as
a. P80,000 c. P50,000 follows:
b. P66,000 d. P46,000
January 1, 2020 June 1, 2020
Raw materials P 60,000 P120,000
Work-in-process 200,000 -
Finished goods 280,000 240,000

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Sales from January 1 to May 31, were P546,750. 10. The estimated cost of inventory at the end of the
Purchases of raw materials were P200,000 and freight current year using the conventional (lower of cost or
on purchases, P30,000. Direct labor during the period market) retail inventory method is
was P160,000. It was agreed with insurance adjusters a. P3,200,000 c. P3,250,000
that an average gross profit rate of 35% based on cost b. P3,000,000 d. P3,360,000
be used and that direct labor cost was 160% of factory
overhead. 11. The estimated cost of inventory at the end of the
current year using the average retail inventory method
The work in process inventory destroyed by fire is
is
a. P366,000 c. P265,000
a. P3,200,000 c. P3,250,000
b. P314,612 d. P185,000
b. P3,000,000 d. P3,584,000

12. The estimated cost of inventory at the end of the

SOLUTION GUIDE:
current year using the FIFO retail inventory method is
Raw materials, 1/1 P 60,000 a. P3,200,000 c. P3,250,000
Purchases 200,000 b. P3,000,000 d. P3,658,480
Freight in 30,000
RM available for use 290,000 13. Which method results in highest cost of sales?
Raw materials, 6/1 ( 120,000) a. Conventional
Raw materials used 170,000 b. Average
Direct labor 160,000 c. FIFO
Factory overhead ? d. Cannot be determined from the information given.
Total manufacturing costs ?
WIP, 1/1 200,000
Total costs placed in process ? SOLUTION GUIDE:
WIP, 6/1 ?
Conventional Average FIFO
Cost of goods manufactured ?
Finished goods, 1/1 280,000 GAS at
TGAS ? cost
Finished goods, 6/1 (240,000)
COGS P ? GAS at
retail
9. Which statement is incorrect regarding the retail
inventory method? Cost ratio
a. The retail method is often used in the retail
EI at cost
industry for measuring inventories of large
numbers of rapidly changing items with similar
margins for which it is impracticable to use other
costing methods. LECTURE NOTES:
b. The cost of the inventory is determined by Differences in applying retail method:
reducing the sales value of the inventory by the
appropriate percentage gross margin. Markdown Beg. Inventory
c. The percentage used takes into consideration
inventory that has been marked down to below its Conventional Exclude Include
original selling price.
Average Include (Deduct) Include
d. A percentage computed using the conventional
retail is required for each retail department. FIFO Include (Deduct) Exclude

Use the following information for the next four questions.

14. In calculating the cost-to-retail percentage for the
Pugo uses the retail inventory method. The following retail method, the cost column will include:
information is available for the current year: a. Markup cancellations
b. Markdown cancellations
Cost Retail
c. Sales returns
Beginning inventory P 1,300,000 P 2,600,000
d. Purchase allowances
Purchases 18,000,000 29,200,000
Freight in 400,000
15. In calculating the cost-to-retail percentage for the
Purchase returns 600,000 1,000,000
retail method, the retail column will include:
Purchase allowances 300,000
a. Sales discounts
Departmental transfer in 400,000 600,000
b. Employee discounts
Net markups 600,000
c. Sales allowances
Net markdowns 2,000,000
d. Purchase returns
Sales 24,700,000
Sales returns 350,000
16. In calculating the cost-to-retail percentage for the
Sales discounts 200,000
retail method, the retail column will not include:
Employee discounts 600,000
a. Purchases
Loss from breakage 50,000
b. Purchase returns
c. Abnormal shortages
d. Freight-in

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17. The records of Binmaley’s Department Store report the 18. Yumul Company provided the following data:
following data for the month of January: Cost Retail
Beginning inventory at cost P 440,000 Beginning inventory P 160,000 P 400,000
Beginning inventory at sales price 800,000 Purchases 2,800,000 3,200,000
Purchases at cost 4,500,000 Freight in 40,000
Initial markup on purchases 2,900,000 Markup 300,000
Purchase returns at cost 240,000 Markup cancellation 30,000
Purchase returns at sales price 350,000 Markdown 160,000
Freight on purchases 100,000 Markdown
Additional markup 250,000 cancellation 40,000
Markup cancellations 100,000 Sales 3,000,000
Markdown 600,000 Physical inventory at
Markdown cancellations 100,000 year end 500,000
Net sales 6,500,000 Estimated normal
Sales allowance 100,000 shrinkage is 4% of
Sales returns 500,000 sales
Employee discounts 200,000
Assuming the company uses the average retail
Theft and other losses 100,000
inventory method, the estimated inventory shortage is
Using the average retail inventory method, Binmaley’s a. P104,000 c. P200,000
ending inventory at cost is b. P130,000 d. P 4,000
a. P360,000 c. P420,000
b. P384,000 d. P448,000
19. The retail inventory method is characterized by
SOLUTION GUIDE: a. The recording of sales at cost.
b. The reporting of year-end inventory at retail in
Cost Retail
the financial statements.
Beginning inventory
c. The recording of markups at retail and
Purchases
markdowns at cost.
Purchase returns
d. The recording of purchases at selling price.
Freight in
Additional mark up
Mark up cancellations
Mark down
Mark down cancellations
- now do the DIY drill -
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DO-IT-YOURSELF (DIY) DRILL

1. Ring Company’s accounting records indicated the 3. On January 1 a store had inventory of P55,000.
following for the current year: January purchases were P46,000 and January sales
were P105,000. On February 1 a fire destroyed most
Inventory, January 1 P6,000,000
of the inventory. The rate of gross profit was 25% of
Purchases 20,000,000
cost. Merchandise with a selling price of P7,500
Sales 30,000,000
remained undamaged after the fire. Compute the
A physical inventory taken on December 31 resulted in amount of the fire loss, assuming the store had no
an ending inventory of P4,500,000. The gross profit insurance coverage.
on sales remained constant at 30% in recent years. a. P11,000 c. P16,625
Ring suspects some inventory may have been taken by b. P 9,500 d. P14,750
a new employee. At December 31, what is the
estimated cost of missing inventory? 4. On December 24, a fire destroyed totally the raw
a. P5,000,000 c. P500,000 materials bodega of Bautista Manufacturing Co. There
b. P4,500,000 d. P 0 was no purchase of raw materials from the time of the
fire until December 31.
2. Compute for the cost of inventory lost in fire using the Inventories 01/01 12/31
data below: Raw materials P 90,000 ?
Inventory, Jan. 1 P 51,600 Factory supplies 6,000 P 5,000
Purchases 368,000 Goods in process 185,000 210,000
Sales 583,000 Finished goods 220,000 225,000
Purchase returns 11,200
Purchase discounts taken 5,800 The accounting records show the following data:
Freight in 3,800 Sales P1,200,000
Sales returns 8,600 Purchases of raw materials 400,000
A fire destroyed the entire inventory except for Purchases of factory supplies 30,000
purchases in transit, FOB shipping point, of P2,000 and Freight-in, raw materials 15,000
goods having selling price of P4,900 that were Direct labor 220,000
salvaged from the fire. The average gross profit rate Manufacturing overhead 75% of direct labor
on net sales is 40%. Gross profit rate 35% of sales
a. P59,760 c. P62,660 The cost of the raw materials destroyed by the fire was
b. P56,940 d. P56,820 a. P140,000 c. P 80,000
b. P 75,000 d. P176,000
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ILLUSTRATIVE PROBLEM
Average Retail Method

A fire destroyed the New Jersey Company’s warehouse causing damage to its inventories stored in the warehouse. The
company uses average retail inventory method in inventory estimation. In connection with this, the company’s
accountant gathered the following information relating its inventories:
Cost Retail Price
Inventory, Beginning 190,000 300,000
Purchase Price 2,900,000 4,000,000
Purchase Discount 50,000 100,000
Purchase Allowance 90,000 150,000
Purchase returns 60,000 120,000
Freight In 20,000 30,000
Net Mark-up 60,000
Net Mark Down 80,000
Departmental Transfer – in (Debit) 386,800 430,000
Departmental Transfer – Out (Credit) 400,000 550,000
Abnormal Wastages 80,000 120,000
Normal Wastages 100,000 120,000
Employee Discounts 6,000 9,500
Sales Discount 5,000 8,200
Sales Allowances 21,000 32,150
Sales Returns 5,000 6,780

The company’s policy is to record sales adjustments directly to sales account. The sales account showed ending balance
of P2,908,000 on the date of fire. Physical inventory conducted after the fire disclosed usable damaged goods which the
company estimates can be sold at P100,000. Also, it is estimated that the company will incur P4,000 to sell the goods.
The original cost of this goods amounted to P50,000.

QUESTION:

How much should the company recognize as loss on inventory fire?

SOLUTION:

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