Mindanao State University

College of Business Administration and Accountancy

DEPARTMENT OF ACCOUNTANCY
Marawi City

INVENTORY ESTIMATION
Practical Accounting 1 Pre-review Program

PROBLEM 1: On May 6, 2013, a flashflood caused dam- ceivable, 1/1 to 8/13

age to the merchandise stored in the warehouse of Rome Payments to suppliers, 1/1
Company. You were asked to submit an estimate of the to 8/13 487,500
merchandise destroyed in the warehouse. The following Goods out on consignment
data were established: at 8/13 at cost 52,900
A. Net sales for 2012 were P800,000 matched Summary on previous years’ sales follows:
against cost of P560,000. 2008 2009 2010
B. Merchandise inventory, January 1, 2013 was P P P
P200,000, 90% of which was in the warehouse 626,00 705,00 680,00
and 10% in the downtown showrooms. Sales 0 0 0
C. For January 1, 2013 to date of flood, you ascer- Gross profit 187,800 225,600 231,200
tained that the invoice value of purchases, all of
4. What is the inventory loss suffered as a result of
which were stored in the warehouse, P100,000;
the fire if the average gross profit rate is used?
freight inward, P4,000; purchases returned,
5. What is the inventory loss suffered as a result of
P6,000.
the fire if the trend in gross profit rate continues?
D. Cost of merchandise transferred from the ware-
house to showrooms was P8,000 and net sales PROBLEM 5: The work in process inventory of San
from January 1 to May 6, 2013, all of which were Marino Company were completely destroyed by fire on
warehouse stock, were P320,000. June 1, 2011. You were able to establish physical inven-
E. There was no change in the gross profit rate tory figures as follows:
adopted by the company in 2013. 1/1/2011 6/1/2011
1. What is the estimated merchandise destroyed by P
the flood? Raw materials P 60,000 120,000
Work in process 200,000 –
PROBLEM 2: The following information relates to Finished goods 280,000 240,000
Roseau, Inc. which accidentally met a fire on the night of Sales from January 1 to May 31 were P546,750. Pur-
January 19, 2013: chases of raw materials were P200,000 and freight on
Inventory, July 1, 2012 P 51,600 purchases, P30,000. Direct labor during the period was
Purchases, July 1, 2012 to January 19, P160,000. It was agreed with insurance adjusters that an
2013 368,000 average gross profit rate of 35% based on cost be used
Sales, July 1, 2012 to January 19, 2013 583,000 and that direct labor cost was 160% of factory overhead.
Purchase returns 11,200
Purchase discounts taken 5,800 6. The work in process inventory destroyed by fire is:
Freight in 3,800 PROBLEM 6: A physical inventory taken on December
Sales returns 8,600 31, 2011 resulted in an ending inventory of P1,440,000.
The fire destroyed the entire inventory except for pur- San Salvador Company suspects some inventory may
chases in transit, FOB shipping point of P2,000 and goods have been taken by employees. To estimate the cost of
having selling price of P4,900 that were salvaged from missing inventory, the following were gathered:
the fire. The average gross profit rate on net sales is P
40%. Inventory, December 31, 2010 1,280,000
2. Compute for the cost of inventory lost in the fire. Purchases during 2011 5,640,000
Cash sales during 2011 1,400,000
PROBLEM 3: San Jose Corporation was organized on Jan- Shipment received on December 26,
uary 1, 2010. On December 31, 2011, the corporation 2011, included in physical inventory
lost most of its inventory in a warehouse fire just before but not recorded as purchases 40,000
the year end count of inventory was to take place. Data Deposits made with suppliers, entered
records disclosed the following: as purchases. Goods were not
2010 2011 received in 2011 80,000
P P Collections on accounts receivable, 2011 7,200,000
Beginning inventory 0 1,020,000
Purchases 4,300,000 3,460,000
Accounts receivable, January 1, 2011 1,000,000
Purchase returns and allowances 230,600 323,000 Accounts receivable, December 31,
Sales 3,940,000 4,180,000 2011 1,200,000
Sales returns and allowances 80,000 100,000 Gross profit percentage on sales 40%
On January 1, 2011, the corporation’s pricing policy was 7. At December 31, 2011, what is the estimated cost
changed so that the gross profit rate would be 3% points of missing inventory?
higher than the one earned in 2010. Salvaged undam-
aged merchandise was marked to sell at P120,000 while PROBLEM 7: On December 24, 2011, a fire destroyed
damaged merchandise marked to sell at P80,000 had an totally the raw materials bodega of Sana’a Manufacturing
estimated realizable value of P18,000. Company. There was no purchase of raw materials from
the time of the fire until December 31, 2011:
3. How much is the inventory loss due to fire? 12/31/201
PROBLEM 4: San Juan Manufacturing began operations 1/1/2011 1
5 years ago. On August 13, 2011, a fire broke out in the P
warehouse destroying all inventory and many records re- Raw materials 90,000 ?
lating to the inventory. The information available is pre- P
sented below (all sales and purchases are on account): Factory supplies 6,000 5,000
8/13/201 Goods in process 185,000 210,000
1/1/2011 1 Finished goods 220,000 225,000
Inventory P 143,850 The accounting records show the following data:
Accounts receivable 130,590 P 128,890 P
Accounts payable 88,140 122,850 Sales 1,200,000
Collections on accounts re- 753,800 Purchases of raw materials 400,000

Prepared by: Mohammad Muariff S. Balang, CPA, Second Semester, AY 2013-2014

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 Purchases of factory supplies 30,000 Markups 300,000
Freight in on raw materials 15,000 Cancelation of markdown 100,000
Direct labor 220,000 Departmental transfer out 350,000 900,000
Manufacturing overhead 75% of direct labor Markdowns 800,000
35% of Cancelation of markup 50,000
Gross profit rate sales 24,700,00
8. The cost of raw materials destroyed by fire was: Sales 0
Sales returns 350,000
PROBLEM 8: The records of Santiago were destroyed by Sales discounts 200,000
fire at the end of the current year. However, certain sta- Sales allowances 100,000
tistical data related to the income statement are avail- Employee discounts 600,000
able: 5% of
P Normal wastage sales
Interest expense 20,000
13. What is the estimated fire loss if Sao Tome applies
Cost of goods sold 2,000,000
the conservative retail approach?
Sales discount 100,000
14. What is the estimated cost of goods sold if Sao
The beginning inventory was P400,000 and decreased Tome applies the FIFO retail approach?
20% during the year. Administrative expenses are 25% 15. What is the estimated ending inventory if Sao
of cost of goods sold but only 10% of gross sales. Four Tome applies the average cost approach?
fifths of the operating expenses relate to sale activities.
PROBLEM 11: Sarajevo Company uses the FIFO retail
9. Ignoring income tax, what is the net income for the
inventory method since its inception in 2010. The
current year?
company unfortunately met a fire in the middle of 2013
PROBLEM 9: On April 30, 2011, a fire damaged the of- resulting into the total loss of its inventories. The retail
fice of Santo Domingo Company. The following balances records reveal the following:
were gathered from the general ledger on March 31, 2012 Cost Retail
2011: P P
P Opening inventory 556,800 928,000
Accounts receivable 920,000 Purchases 4,576,000 7,028,000
Inventory, 1/1/2011 1,880,000 Net markup 42,000
Accounts payable 950,000 Net markdown 30,000
Sales 3,600,000 Sales 6,840,000
Purchases 1,680,000 2013 Cost Retail
Additional information follows: P P
Purchases 2,380,000 3,406,000
A. An examination of the April bank statement and
Net markup 28,000
canceled checks revealed checks written during
the period April 1 to 30 as follows: Net markdown 34,000
Accounts payable, 3/31 P 240,000 Sales 900,000
April merchandise shipments 80,000 16. Determine the estimated inventory fire loss of
Expenses 160,000 Sarajevo Company in 2013.
Deposits during the same period amounted to
P440,000 which consisted of collections from PROBLEM 12: The records of Seoul’s Department Store
customers with the exception of P20,000 refunds report the following data for the month of January:
from a vendor for merchandise returned in April. Beginning inventory at cost P 440,000
B. Customers acknowledged indebtedness of Beginning inventory at sales price 800,000
P1,040,000 at April 30. Customers owed another Purchases at cost 4,500,000
P60,000 that will never be recovered. Of the ac- Initial markup on purchases 2,900,000
knowledged indebtedness, P40,000 may prove Purchase returns at cost 240,000
uncollectible. Purchase returns at sale price 350,000
Freight on purchases 100,000
C. Correspondence with suppliers revealed un-
Additional markup 250,000
recorded obligations at April 30 of P340,000 for
Markup cancellations 100,000
April merchandise shipment including, P100,000
Markdown 600,000
for shipments in transit on that date.
Markdown cancellations 100,000
D. The average gross profit rate is 40%.
Net sales 6,500,000
E. Inventory with a cost of P260,000 was salvaged Sales allowance 100,000
and sold for P140,000. The balance of the inven- Sales returns 500,000
tory was a total loss. Employee discounts 200,000
10. What is the amount of sales from January 1, 2011 Theft and other losses 100,000
to April 30, 2011?
17. Using the average retail inventory method, what is
11. What is the amount of purchases from January 1,
the inventory shortage?
2011 to April 30, 2011?
12. What is the amount of fire loss to be recognized on PROBLEM 13: Singapore Company uses the LIFO retail
April 30, 2011? method of inventory valuation. The following information
is available for the 2013:
PROBLEM 10: Sao Tome uses the retail inventory
Cost Retail
method. At the end of the current year, Sao Tome
P P
suffered a fire loss that destroyed most of its inventory.
Beginning inventory 1,200,000 1,500,000
After the fire, only goods with a selling price of P125,000,
Net purchases 4,200,000 5,900,000
a cost of P100,000 and a net realizable value of P75,000
Net markups 200,000
was salvaged. The following information is available prior
Net markdowns 100,000
to the fire:
Net sales 5,500,000
Cost Retail
P P 18. What is the estimated cost of ending inventory of
Beginning inventory 1,100,000 2,200,000 Singapore Company as of December 31, 2013?
15,800,00 26,300,00
PROBLEM 14: A fire destroyed the Skopje Company’s
Purchases 0 0
warehouse causing damage to its inventories stored in
Freight in 540,000
the warehouse. The company uses the average retail in-
Purchase returns 600,000 1,000,000
ventory method in inventory estimation. In connection
Purchase allowances 300,000
with this, the company’s accountant gathered the follow-
Departmental transfer in 400,000 800,000
ing information relating to its inventories:
Prepared by: Mohammad Muariff S. Balang, CPA, Second Semester, AY 2013-2014
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 Cost Retail will incur P4,000 to sell the goods. The original cost of
Inventory, beginning 190,000 300,000 this goods amounted to P50,000.
Purchase price 2,900,000 4,000,000 19. How much should the company recognize as loss
Purchase discount 50,000 100,000 on inventory fire?
Purchase allowance 90,000 150,000
Purchase returns 60,000 120,000 PROBLEM 15: Sofia Company has provided you the
Freight in 20,000 30,000 following data:
Net markup 60,000 Cost Retail
Net markdown 80,000 Beginning inventory P160,000 P 400,000
Departmental transfer in 386,800 430,000 Purchases 2,800,000 3,200,000
Departmental transfer out 400,000 550,000 Freight in 40,000
Abnormal wastages 80,000 120,000 Markup 300,000
Normal wastages 100,000 120,000 Markdown 160,000
Employee discounts 6,000 9,500 Markup cancelation 30,000
Sales discount 5,000 8,200 Markdown cancelation 40,000
Sales allowances 21,000 32,150 Sales 3,000,000
Sales returns 5,000 6,780 Physical inventory at year- 500,000
The company’s policy is to record sales adjustments di- end
rectly to the sales account. The sales account showed Estimated normal shrinkage 4% of
ending balance of P2,908,000 on the date of fire. Physi- sales
cal inventory conducted after the fire disclosed usable 20. Assuming the use of the average retail inventory
damaged goods which the company estimates can be method, how much is the inventory shortage?
sold at P100,000. Also, it is estimated that the company

Prepared by: Mohammad Muariff S. Balang, CPA, Second Semester, AY 2013-2014

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