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FAR OCAMPO/OCAMPO
FAR.3203-Estimating Inventories MAY 2022

DISCUSSION PROBLEMS
1. Techniques for the measurement of the cost of 6. The Bayambang Corporation was organized on Jan. 1,
inventories may be used for convenience if the results 2021. On Dec. 31, 2022, the corporation lost most of
approximate cost. The following are acceptable for its inventory in a warehouse fire just before the year-
year-end financial reporting purposes, except end count of inventory was to take place. Data from
a. Standard cost method the records disclosed the following:
b. Retail method 2021 2022
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 Jan. 1, 2022, the Corporation’s pricing policy was
determined under either periodic or perpetual changed so that the gross profit rate would be three
system. percentage points higher than the one earned in 2021.
d. In all of these.
Salvaged undamaged merchandise was marked to sell
3. The use of the gross profit method assumes at P120,000 while damaged merchandise was marked
a. The amount of gross profit is the same as in prior to sell at P80,000 had an estimated realizable value of
years. P18,000.
b. Sales and cost of goods sold have not changed
How much is the inventory loss due to fire?
from previous years.
a. P918,200 c. P856,200
c. Inventory values have not increased from
b. P947,000 d. P824,600
previous years.
d. The relationship between gross profit and sales
7. Luna Manufacturing began operations 5 years ago. On
remains stable over time.
Aug. 13, 2022, a fire broke out in the warehouse
destroying all inventory and many accounting records
4. The gross profit method assumes
relating to the inventory. The information available is
a. The beginning inventory plus purchases equal total
presented below. All sales and purchases are on
goods to be accounted for.
account.
b. Goods not sold must be on hand.
Jan. 1, Aug. 13,
c. If sales, reduced to cost, are deducted from the
2022 2022
sum of the opening inventory plus purchases, the
Inventory P143,850
result is the ending inventory.
Accounts Receivable 130,590 P128,890
d. All of these.
Accounts Payable 88,140 122,850
Collections on accounts rec.,
5. On May 6, 2022 a flash flood caused damage to the
Jan. 1- Aug. 13 753,800
merchandise stored in the warehouse of Cabanatuan
Payments to suppliers,
Co. You were asked to submit an estimate of the
Jan. 1- Aug. 13 487,500
merchandise destroyed in the warehouse. The
Goods out on consignment
following data were established:
at Aug. 13, at cost 52,900
a. Net sales for 2021 were P800,000, matched
against cost of P560,000. Summary on previous years’ sales:
b. Merchandise inventory, Jan. 1, 2022 was 2019 2020 2021
P200,000, 90% of which was in the warehouse and Sales P626,000 P705,000 P680,000
10% in downtown showrooms. Gross Profit 187,800 183,300 231,200
c. For Jan. 1, 2022 to date of flood, you ascertained GPR 30% 26% 34%
invoice value of purchases (all stored in the
warehouse), P100,000; freight inward, P4,000; Determine the inventory loss suffered as a result of the
purchases returned, P6,000. fire.
d. Cost of merchandise transferred from the a. P139,590 c. P86,690
warehouse to show-rooms was P8,000, and net b. P102,560 d. P86,310
sales from Jan. 1 to May 6, 2022 (all warehouse
stock) were P320,000.
8. The work-in-process inventory of Burp Company were
Assuming gross profit rate in 2022 to be the same as completely destroyed by fire on June 1, 2022. You
in the previous year, the estimated merchandise were able to establish physical inventory figures as
destroyed by the flood was follows:
a. P80,000 c. P50,000
b. P66,000 d. P46,000 Jan. 1, 2022 June 1, 2022
Raw materials P 60,000 P120,000
Work-in-process 200,000 -
Finished goods 280,000 240,000

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EXCEL PROFESSIONAL SERVICES, INC.

Sales from Jan. 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 ?
Cost of goods manufactured ? Conventional Average FIFO
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 allowances 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
- done -
GAS

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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:

J - end of FAR.3203 - J

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