FOR RECITATION NEXT MEETING - FRIDAY

PROBLEMS ON GROSS PROFIT METHOD

1. Kesler, Inc. estimates the cost of its physical inventory at March 31 for use in an
interim financial statement. The rate of markup on cost is 25%. The following account
balances are available:
Inventory, March 1 P220,000
Purchases 172,000
Purchase returns 8,000
Sales during March 300,000
What is the estimate of the cost of inventory at March 31 would be?

ANSWER:
COGS = Sales / 1+GP (Based on Cost)
COGS = P300,000 ÷ 1.25 = P240,000
(P220,000 + P172,000 – P8,000) – P240,000 = P144,000

2. On January 1, 2010, the merchandise inventory of Glaus, Inc. was P800,000. During
2010 Glaus purchased P1,600,000 of merchandise and recorded sales of P2,000,000.
The gross profit rate on these sales was 25%. What is the merchandise inventory of
Glaus at December 31, 2010?

ANSWER:
Beginning Inventory P 800,000
Add: Purchases P1,600,000
Cost of Goods Available P 2,400,000

Sales P2,000,000
Less: GP Ratio 25% 500,000 1,500,000
Estimated Inventory Lost 900,000

3. For 2010, cost of goods available for sale for Tate Corporation was P900,000. The gross
profit rate was 20%. Sales for the year were P800,000. What was the amount of the
ending inventory?

ANSWER:
Cost of Good Sold Available for sale 900,000
Sales 800,000
Less: 20% x 20 = (160,000) 640,000
Ending Inventory 260,000
4. On April 15 of the current year, a fire destroyed the entire uninsured inventory of a retail
store. The following data are available:
Sales, January 1 through April 15 P300,000
Inventory, January 1 50,000
Purchases, January 1 through April 15 250,000
Markup on cost 25%
The amount of the inventory loss is estimated to be
ANSWER:
COGS = Sales / 1+GP (Based on Cost)
COGS = P 300,000 ÷ 1.25 = P 240,000
(P 50,000 + P 250,000) – P 240,000 = P60,000

5. The sales price for a product provides a gross profit of 25% of sales price. What is the
gross profit as a percentage of cost?

ANSWER:
Sales 100%
COGS (25%)
Gross Profit 75%
Gross Profit Rate 25 / 75 = 33.33%
6. Gamma Ray Corp. has annual sales totaling P650,000 and an average gross profit of
20% of cost. What is the peso amount of the gross profit?

ANSWER:
Sales 120% 650,000
Cost (100%) 650,000 / 1.20 = 541,667
Gross Profit 20% = 108,333

7. On August 31, a hurricane destroyed a retail location of Vinny's Clothier including the
entire inventory on hand at the location. The inventory on hand as of June 30 totaled
P320,000. From June 30 until the time of the hurricane, the company made purchases of
P85,000 and had sales of P250,000. Assuming the rate of gross profit to selling price is
40%, what is the approximate value of the inventory that was destroyed?

ANSWER:
Beginning Inventory 320,000
Add: Purchases 85,000
Cost of Goods Available 405,000

Sales 250,000
Less: GP Ratio 40% 100,000 150,000
 Estimated Inventory Lost 255,000

8. On October 31, a fire destroyed PH Inc.'s entire retail inventory. The inventory on hand
as of January 1 totaled P680,000. From January 1 through the time of the fire, the
company made purchases of P165,000 and had sales of P360,000. Assuming the rate
of gross profit to selling price is 40%, what is the approximate value of the inventory that
was destroyed?

ANSWER:
Opening Inventory 680,000
Add: Purchases 165,000
Cost of Sales Available 845,000

Sales 360,000
Less: GP ratio 40% 144,000 216,000

Estimated Inventory Lost 629,000

9. On March 15, a fire destroyed Interlock Company's entire retail inventory. The inventory
on hand as of January 1 totaled P1,650,000. From January 1 through the time of the fire,
the company made purchases of P683,000, incurred freight-in of P78,000, and had
sales of P1,210,000. Assuming the rate of gross profit to selling price is 30%, what is the
approximate value of the inventory that was destroyed?

ANSWER:
Formula:
Cost of goods destroyed = beginning balance + purchase + freight in - cost of goods sold

= 1, 650,000 + 683,000 + 78,000 = 2,411,000

= 1,210,000 x 70% = 847,000
= 2,411,000 - 847,000 = P 1,564,000
 II. PROBLEM ON MANUFACTURING BUSINESS.

10. The following information is for the Bayway Manufacturing Company for November.

Inventories Beginning Ending

Raw Material P17,400 P13,200
Work in Process 31,150 28,975
Finished Goods 19,200 25,500

Direct Labor (21,000 DLH @ P13)

Raw Material Purchases P120,000 Insurance-Office 2,570
Indirect Labor 11,200 Office Supplies Expense 900
Factory Supplies Used 350 Insurance-Factory 1,770
Other Expenses: Depr. Office Equipment 3,500
Depr.-Factory Equipment 17,300 Repair/Maintenance- 7,400
Factory

1. Prepare in good form a Statement of Cost of Goods Sold.

2. Compute the total Inventory

Bayway Manufacturing Company

Statement of cost of goods manufactured
For the year ended November 31

Beginning Inventory 17,400 - Raw Materials (beg)

Purchases 120,000 - Raw Materials Purchase
Available for use 137,400 - Raw Materials avail. For use
Ending Inventory (13,200) - Raw Materials (end)
DM used 124, 200 - Raw Materials Used
Direct Labor (21,000 x 13) 273,000
FOH 11,550 - Indirect labor + factory supplies Used
Total Manufacturing Cost 408,750

WIP, Beginning 31,150 - Work in Process (beg)

In process 439,900
WIP End (28,975 - Work in Process (end)
CGAS 410,925 - CGAS
FG Beginning 19,200 - Finished Goods(beg)
CGAS 430,125 - COGAS
FG End (25,500) - Finished Goods (end)
COGJ P404,625 - COGS

Compute the total Inventory

Ending Inventory 13,200

Work in process (end) 28,975
Finished Good (end) 25,500
Total Inventory 67,675