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3. The use of the gross profit method;"assumes Salvaged undamaged merchandise was marked to sell
a. The amount of gross profit is ffiesame as in prior at P1io,ooo while damaged merchandise was marked
years. to sell at PS0,000 had an estim~d realizable value of
b. Sa!es and cost of goods sold have not changed r ~s,_ooo. - ) . ;
· · from previous years.
How much is the inventory loss due to fire?
c. - Inventoty values have not increased from
. . previous years. • a. P918,200 r-,: :. c. P856,200
d) The relationship between gross profit and sales .~ P947,000 ,1 , , d. P824,600
. #-,~;;; ·
I!!.!!'lalns s~~~ over time.
7. Luna Manufacturing began operations 5 years ago. On
4'. The gross profit method ;lssumes"', August 13, 2020, a fire broke out in the warehouse
a. The .beglnning .lnventorviiliis'purchases equal total destroying all inventory and many accounting records
goods to be accounted for. ./ relating to the Inventory. The Information avallable is
b. Goods not sold must be on hand. ✓ presented below. All sales and purchases are on
account.
c. If sales, reduced to cost, are deducted from the
sum of the opening inventory pl(!S purchases, the January 1, August 13,
.- result is the ending inventory. / .2Q2Q . 2Qi.Q
Inventory P143,850
~ All of these.
Accounts Receivable 1, ·.• . 130,590 P128,890 l~J
Accounts Payable 1• •,,.,., 88,140 122,850 : <1 J i ()
5. On May 6, 2020 a fl.ash flood caused damage to the
merchandise stored ·tn the warehouse of Cabanatuan Collections on accounts rec.,
,rS3 tw
✓ Co. You were asked to subl!lit an estimate of the
Jan. 1- Aug. 13 ~ 753,800
~- ~t;:i,
~'\'>\O
merchandise destroyed in • the warehouse. The PaymJ!nts to· suppller,s, \\ ~
following data were established: Jan. 1- Aug. 13 .4875011
a. Net sales for 201'9 were PS00,000, matched- Goods out on consignment \~ ) ~ " ,,,..,.,.--,· ~
against cost of PS60,000. (_t~1vt,u ') ~ u , 0 1. '° at Aug. 13, at cost n,1., ~i,-i 52,900
b. Merchandise inventory, Jan. 1, 2020 was Summary on previous years' sales:
P200,0001 90% of which was in the warehouse and
10% in downtown showrooms. '1,, J>!'lb/.• 110 2.Q1Z .221.a 2212
· c. For Jan. l, 2020 to date of ftood,.. you ascertained Sales P626,000 P705,000 P680,000
invoice_ value of purchases · (all stored in the Gross Profit 187,800 183,300 231,200
·warehouse), Pl00,000; freight Inward P4 000· GPR .• 30%. .1- 26% 1- 34% " Jv/.
purchases returned, P6,000. 1cro ➔ 'f~ (, • <fr ' ' Determine the inventory loss sufferecfas a result of the
d. Cost of merch<!ndise transferred from the fire. IN\t 0\,11
warehouse t<> show-rooms was PS 000 and net a. P139,590 ch qni) (;_ ) P86,690
sales from January 1 to May '5, ·2020 (all b. P102,560 (!ir., 4"N') '--if. P86,310
ware~9use stock) were P320,000. ~
k-v 1,qO
Assuming gross profit rate in 2020 to be the same as --=::;:::;;
in the previous year, the estimated merchandise 8. The work-in-process Inventory .of Burp Company were
destroyed by the flood was · completely destroyed by fire on June 1, 2020. Yo(J
a. PS0,000 PS0,000 were able to establish physical inventory figures as
b. P66,000 follows:
P46,000
/l\),w
January 1, _l.QiQ June 1. 20:;o
Raw materials ) ( P120,000)
iuv rw .
Work-in-process
'I "'" Finished goods \)
Page 1 of 4
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www.prtc.com,ph
~ ( 240,000)
FAR.2B03
~EX~C;.;E.LP_R_o_FE_s_s1o_N_A_L_s_ER_v_1c..Es_._1N_c_
.---------~------
~4 ~:/~1): 1 ,c, Y• 11W nt• r<\O\ du.,I\ ,, t ,rcl.,,(jr,(
Sales from January 1 to May 31, were PS46,750 . 10. The estimated cost ~ o ·Allen_!gry at the end ,:if the
Purchases of raw materials were ~,QQ_O .and fre ight current year using th conventional (lower _o~ cost or
on purchases, '-30,009. Direct l~b~r during the period market) retail Inventory ethml is
was ~160,000. n-was agreed with insurance adjusters a. P3,200,000 c. P3,250,tJOO
that ~ e gross profit rate of 35% based on cost l b. P3,000,000 d. P3,36o,noo
be used and that direct labor cost Vias 160% of factory l'1 \ Vf h,u, , \ l ll l ft f r)f(i
0
overhead. rH "" - , t. , ,r, ,.~ 11. The estimated cost of Inventory at the end ,of the
current year using the ,average retail•inventory rr.,ethod
The work in process inventory dest~ yed by fire is is
a. P366,000 L°N""' . c. P265,000
a. P3,200,000 c. P3,250,000
b. P314,612 \~ : PlSS,000
b. P3,000,000 d. P3,584,000
¼<•"
SOLUTION GUIDE:
--= ,1,9,nq1,1\I .,~ n~ •ll• l• 1' ~ , ,. ~•t d1u ,, . , ~-.! ••~
12. The estimated cost of inventory at the end of the
current year using the IFIFO retail in,,v.entory methc•d 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 ill.Q.QQQl a. Conventional ·
Raw materials used 170,000 o. Average
Direct labor 160,000 c. FIFO
Factory overhead l j ,L tl , ? d. Cannot be determined from the information g iven .
Total manufacturing costs ~)t. c•J., 7
WIP, 1/1 _2!)0, 000
Total costs placed in process SOLUTION GUIDE:
WIP, 6/1 ,c~ . . ,,_v?-- .. L ._ 1 ,
~••l~J( \, v.o
www.prtc.com,ph FAR.,!803
ROFESSIONAL SERVICES, INC .
f> 440,000
800,000
4,500,000
2,900,000
18. Yumul Company provided the following data :
Beginning Inventory
Purchases
Freight in
Markup
I p 160,000
, 2,800,000
40,000
-------
CQS1
-
p 400,000
3,200,000
300,000
30,000
'
Markup cancellation
PFurchase returns at sales price 240,000 160,000
Markdown
relght on purchases 350,000
Addit ional markup 100,000 Markdown
cancellation 40,000
Markup cancellations 250,000 ( ·.,. r , .,
3,000,000
Markdown 100,000 Sales
l
( j' • • I
600,000 Physical Inventory at
.~ ar)kdown cancellations 100,000 year end \ .>6 00,000 , ' - '
I
\ Ne~ sales 6,SOCi,ooo Estimated normal t_' fl •l I
'Sales allowance ·-, ,. , ,..1,1 100,000 shrinkage is 4% of
Sales returns soo,ooo sales
Employee discounts • 200,000 Assuming the company uses the e_verag~ retail
Theft and other losses , 100,000 J inventory method, the estimated tnventofysfiortage is
Using the ~
retail Inventory method, Binmaley's 1 a. P104,000 c. P200,000
e~ in¥ e ~t is 'ti P130,000 d. P 4,000
a. P360,000 c. P420,000
~ 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
CQSt the financial statements.
Beginning inventory c. The recording of markups at retail and
Purchases markdowns at cost.
., ,)
Purchase returns ),
----
·i f..l .).IJ
Mark down cancellations ·.u; ,. '>J ,_ffl ,1,Jj ~ OW do the DIY drill - .
GAS
. l Ci)O (.()'J • }; !.
DO-IT-YOURSELF (DIV) DRILL
1. Ring Company's accounting records indicated the 3. On January 1 a store had. inventory of P.55,00!)J
following for the current year: January purchases were P,~6,000) and Januarysales
were Pj_QS,.000. On February f a fire destroyed most
Inventory, January 1 P6,000,000 1 ,,,.,
pf t inventory. The rate of gross profit was 25% of
Purchases 20,000,000· ·
Sales '''°
30,000,000 1 1· ' '.'''-
( cost Merchandise with a selling price of P.It.500
ained undamaged after the fire. Compute the
A ptiystcal Inventory taken on December 3~ resulted in amount of the fire loss, assuming the store had no
an ending inventory of P4,SOO,OOO. The gross profit insurance coverage.
on sales ·remained constant at 30% in recent years. :SJ Pll,QQO ' l)(W,l I\Jlo,->,l
q.iw-
C
'
P16,625
Ring suspects some Inventory may have beeh taken by b. P 9,500 ~ - - - d. P14,750
a new employee. At December 31, what is the '1 '.'lk._. . ,: \\ \f,IJ
estimated· cost df miss~ lnventorv.~7- · . f On De~mbek •; r,' a fire destroyed totally the raw
a. PS,000,000 t""" · · c. PS00,'000 A materials bodega of Bautista Manufacturlr:,g Co. There
b. P4,500,000 ~ · . P 0 was no purchase of raw materials from the time of the
!;l)jllc,.,) -'I"' "" ' ~ fire until December 31.
2. Compute for the cost of inventory lost In ·rire ·using the
Inventories . . .0.lLOl .12D.l
data below: Raw materials ? P ·90,000
Inventory, Jan. 1 ~ P 51,600 Factory supplies
P · 5,000 6,000
·. Purchases -t 368,000 i10,ooo v; ·
Goods in process 185,000
Sales 583,000 ~ 225,000 s-
Finished, goods · .229,000
Purchase returns 'lv~'l"J _ 11,200 l'l'i ~,-;i ___,
Purchase discounts taken ~ _ 5,800 , ~'r
The accounting records show the following data:
Freight in ~~t~ r 3,800 ~ Sales Pl 200.,'o~6 ' ~W •"'
Sales returns ~ "o 8,600 ~ Purchases of raw materials ' '400'.oo~
A fire destroyed the entire Inventory except for Purchases of factory supplies 30,000 t ~\>"-'
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 Ii.<"°' 75% of direct labor
on net sales ts 40%. Gross profit rate 35% of sales
a. P59, 760 'lol ~uo c. P62,660
The cost of the raw materials destro_yed by the fire was
b. P56,940 ~ , -~ P56,820 a. Pl40,000 •✓ cJ P 80,000
(1,~
--:;::::
b. P 75,000 Pl 76,000 a.
e- end - e
Page 3 of 4 www.prtc.com,ph FAR.2B03
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EXCEL PROFESSIONAL SERVICES. INC.
- ILLUSTRATIVE PROBLEM
Average Retail Method
A fire destroyed the New Jersey Company's warehouse causing damage to its inventories stored In the warehouse. Th,e
company ,uses average retail inventory method in Inventory estimation . In connection with this, the company s
accountant gathered the following information relating it s inventories :
~~t R.etajl 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
Abnorma l 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 adj ustment s 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 Pl00,000. Also, it is estimated that the company will Incur P4,000 to sell the goods.
The original cost of this goods amounted to PS0,000 .
,QUESTION:
SOLUTION:
Cost Retail
Inventory, Begrining 190,000 300,QOO
Purchaees 2,900,000 4,000,000
Purchase Discount (50,000)
Purchaae Alowanc:e (90,000)
Purchase returns (60,000) (120,000)
Freight In 20,000
Net markup 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} ·
Goods available for sale 2 1e1a 1eoo 3.020.000
Coat ratio 0.72
Goods avallable tbr sale at retail, 3,920,000
Leas: Net sales 2,908,000
Sales dlSClOUnt 8,200
Sales allowance 32,150
Normal wastages 120,000
Employee disoounta 9 ,500 3,077,850
Estimated lnvantory, DOF a.t retail
X coat ratio
842,150
0.72
Estima1ad inventory, OOF at cost
806,348
Cost of uisable damaged goods
Estimated inventory fire, 1088
,so,ooo)
55813'&8
@• end of FAR.2803 - @