INTERMEDIATE ACCOUNTING 1 ALVAREZ / PEDROS

INVENTORIES (PART 2)

I. GROSS PROFIT METHOD

1. An entity reported the following amounts for the current year:

Net sales P4,000,000

Less: COGS (2,800,000)
Gross profit P1,200,000
Requirement: Compute for the gross profit rate under both (1) Sales and (2) Cost basis.

2. Complete the table below:

Particulars Based on Sales Based on Cost
Net Sales 100% ???
Less: COGS 80% ???
Gross Profit 20% ???
Particulars Based on Sales Based on Cost
Net Sales ??? 135%
Less: COGS ??? 100%
Gross Profit ??? 35%
Particulars Based on Sales Based on Cost
Net Sales 100% ???
Less: COGS 70% ???
Gross Profit 30% ???
Particulars Based on Sales Based on Cost
Net Sales ??? 140%
Less: COGS ??? 100%
Gross Profit ??? 40%

3. Zilong Company reported the following information for the year:

Gross sales P5,000,000
Sales returns 500,000
Sales discount 24,000
Sales allowance 20,000
Requirements: Under each of the following independent scenarios, determine the amount of COGS:
a. Gross profit rate based on sales of 25%
b. Gross profit rate based on cost of 25%
4. For the year 2024, Tigreal Company had purchases of P1,500,000, purchase discounts of P20,000,
purchase returns and allowances of P80,000 and freight in of P350,000. At the beginning of the year,
the Company also had P550,000 of inventory. During 2024, the Company generated gross sales of
P2,535,000, sales returns of P135,000, sales allowances of P70,000 and sales discounts of P50,000.
The Company usually applies a gross profit rate of 25% based on sales.

Required: Using the gross profit method, determine the estimated amount of inventory as of
December 31, 2024.
5. Belerick Company has two types of inventories Product A and Product B with gross profit rates
based on sales of 20% and 50%, respectively. Total goods available for sale (TGAS) is P2,000,000 for
Product A and P3,500,000 for Product B. Net sales totaled P4,950,000, divided into P950,000 for
Product A and P4,000,000 for Product B.

Required: Compute for the total estimated amount of ending inventory using the gross profit
method.

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6. At the beginning of 2024, Hayabusa Company had an inventory balance of P1,600,000. For the year
2024, the Company reported the following information:

Purchases P2,700,000 Gross sales P6,100,000

Purchase discounts 40,000 Sales returns 100,000
Purchase returns 60,000 Sales discounts 30,000
Freight in 150,000 Sales allowances 90,000

The Company normally charges 30% gross profit on its regular sales. However, sales amounting to
P1,000,000 were made through a one-time wholesale transaction. Gross profit rate on sales charged
in this transaction was 20% and that no sales returns were received from this.
Required: Determine the estimated ending inventory using gross profit method.

II. INVENTORY ESTIMATION (GROSS PROFIT METHOD)

7. On September 5, 2014, a fire damaged the warehouse of Lolita Company. All inventory items and
many accounting records stored in the warehouse were destroyed. However, a portion of the
inventory could be sold for scrap. The company's backup files provide the following in-formation:

Inventory, January 1 1,750,000

Cash sales, January 1 - September 5 445,000
Purchases, January 1 - September 5 2,770,000
Collection of accounts receivable, January 1 - September 5 4,230,000
Accounts receivable, January 1 350,000
Accounts receivable, September 5 530,000
Salvage value of inventory 15,000
Gross profit ratio (based on sales) 32%

Requirements:
a. What is the estimated inventory fire loss?
b. What is the estimated inventory fire loss assuming gross profit is based on cost?

8. On January 1, 2024, Atlas Company reported inventory balance of P780,000. During 2024, the
Company reported net sales of P5,200,000 and net purchases of P3,550,000. Relevant gross profit
rate is 40% based on cost.
Requirements: Under each of the following independent scenarios, determine the amount of
inventory shortage or overage:
a. Inventory has cost of P935,000 based on physical count.
b. Inventory has cost of P1,185,000 based on physical count.

9. Ruby Co. was organized on January 1, 2023. On December 31, 2024, the company lost most of its
inventory in a warehouse fire just before the year-end count of inventory was to take place. The
company's records disclosed the following data:

2023 2024
Inventory, January 1 P0 P 204,000
Purchases 860,000 692,000
Purchases returns and allowance 46,120 64,600
Sales 788,000 836,000
Sales returns and allowance 16,000 20,000

On January 1, 2024, Ruby’s pricing policy was changed so that the gross profit rate would be three
percentage points higher than the one earned in 2023. Salvaged undamaged merchandise was
marked to sell at P24,000 while damaged merchandise marked to sell at P16,000 had an estimated
realizable value of P3,600.
Requirements:
a. What is the company's gross profit rate beginning January 1, 2024?
b. How much is the inventory fire loss?

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III. RETAIL INVENTORY METHOD

10. Lesly Company wants to estimate its ending inventory balance by applying the retail inventory
method. For the year ended and as of December 31, 2024, the following amounts were reported:

Beg. Inv., at cost 1,300,000 Transfer-in, retail 1,000,000

Beg. Inv., at retail 2,000,000 Transfer-out, retail 650,000
Gross purchases, cost 5,916,000 Normal loss, cost 70,000
Gross purchases, retail 8,870,000 Normal loss, retail 100,000
Purchase returns, cost 500,000 Abnormal loss, cost 616,000
Purchase returns, retail 720,000 Abnormal loss, retail 800,000
Purchase allowance, cost 120,000 Gross sales 8,500,000
Purchase discounts, cost 90,000 Sales returns 550,000
Transfer-in, cost 700,000 Sales discounts 130,000
Transfer-out, cost 490,000 Sales allowances 400,000
Employee discounts 250,000 Freight in 900,000
Markups 1,700,000 Markdowns 1,450,000
Markup cancellations 200,000 Markdown cancellations 250,000
Net Markups 1,500,000 Net Markdowns 1,200,000

Requirements: Compute for the Ending inventory at cost and Cost of Sales assuming
a. Conservative Method
b. First-in, First-Out Method
c. Average Method

11. Presented below is information taken from Balmond Company for the three months ended March
31:

Cost (in Peso) Retail (in Peso)

Inventory, Jan 1 179,600 200,000
Purchases 475,400 800,000
Purchase returns 50,000 80,000
Purchase discounts 23,000
Purchase allowance 10,000
Freight-in 5,000
Markups 200,000
Markup cancellations 40,000
Departmental transfer-in 70,000 100,000
Departmental transfer-out 60,000 90,000
Abnormal loss 20,000 40,000
Markdown 115,000
Markdown cancellations 10,000

Sales 800,000
Sale returns 80,000
Sales allowance and discounts 120,000
Normal shrinkage 100,000

Requirements: Compute for the Ending inventory at cost and Cost of Sales assuming
a. Conservative Method
b. First-in, First-Out Method
c. Average Method

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12. On the night of June 1, 2024, a fire consumed a significant portion of Kadita Company's inventory
in one of its warehouses. From January 1, 2024 to June 1, 2024, the Company reported the following
information:

at Cost at Retail
Inventory, January 1 P 1,316,000 P 2,200,000
Net Purchases 2,584,000 3,800,000
TGAS 3,900,000 6,000,000
Net Sales 4,500,000

The Company uses the average method. Additional information was provided as follows:
a. Damaged goods originally marked to sell at P500,000 is saleable to a recycling plant for
P150,000.
b. Undamaged goods originally marked to sell at P300,000 were recovered.
c. In-transit goods purchased FOB shipping point at an invoice amount of P220,000 were
already included in the net purchases at cost and at retail columns.
d. There were in-transit goods sold FOB destination at an invoice price of P90,000. These were
not included in the reported net sales.

Required: Determine the amount of estimated inventory fire loss.

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