Inventory estimation

Your client, Mandaluyong Company, is an importer and wholesaler. Its merchandise is purchased
from several suppliers and is warehoused until sold to customers.

In conducting your audit for the year ended December 31, 2015, you were satisfied that the
system of internal control was good. Accordingly, you observed the physical inventory at an
interim date, November 30, 2015 instead of at year end. You obtained the following information
from your client’s general ledger:

Inventory, January 1, 2015 P1, 312,500

Physical inventory, November 30, 2015 1, 425,000
Sales for 11 months ended Nov. 30, 2015 12,600,000
Sales for the year ended Dec. 31, 2015 14,400,000
Purchases for 11 months ended Nov. 30, 2015 10,125,000
(before audit adjustments)
Purchases for the year ended Dec. 31, 2015 12,000,000
(before audit adjustments)

Your audit disclosed the following information:

a.) Shipments received in November and included in the physical inventory but recorded as
December purchases P112, 500

b.) Shipment received in unsalable condition and excluded from physical inventory. Credit
memos had not been received nor chargebacks to vendors been recorded:

Total at Nov 30, 2015 P15, 000

Total at Dec 31, 2015 (including the November unrecorded chargebacks) P22, 500

c.) Deposit made with vendor and charged to purchases in October 2015. Product was shipped in
January 2016 P30, 000

d.) Deposit made with vendor and charged to purchases in November 2015. Product was shipped
FOB destination on November 29, 2015 and was included in November 30, 2015 physical
inventory as goods in transit P82, 500

e.) Through the carelessness of the receiving department shipment in early December 2015 was
damaged by rain. This shipment was later sold on the last week of December at cost.
P150,
000

REQUIRED:

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 Determine the December 31, 2015 inventory using the gross profit method.

SOLUTION:

Computation of adjusted balances:

Inventory Purchases Purchases
Up to Up to Dec.
Nov. 30 Nov. 30 31
1,425,00 10,125,0 12,000,0
Unadjusted balances 0 00 00
Add (deduct) adjustments:
112,5
a - 00 -
(15,0 (22,50
b - 00) 0)
(30,0 (30,00
c - 00) 0)
(82,50 (82,5
d 0) 00) -
e - - -
1,342,50 10,110,0 11,947,5
0 00 00

1,312,50
Inventory, January 1 0
Add - Net purchases up to Nov. 10,110,0
30 00
11,422,5
Total goods available for sale 00
1,342,50
Less - Inventory, Nov. 30 0
10,080,0
Cost of sales for 11 months 00

Sales for 11 months ended Nov. 12,600,0

30 00
(10,080,0
Cost of sales for 11 months ended Nov. 30 00)
2,520,00
Gross profit 0
12,600,0
Divide by sales for 11 months ended Nov. 30 00

Gross profit rate for 11 months ended Nov. 30 20.00%

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 Computation of inventory, 12/31
1,312,50
Inventory, January 1 0
11,947,5
Add - Purchases for the year ended Dec. 31 00
13,260,0
Total goods available for sale 00
Less - Cost of sales
Cost of sales with profit [(14,400,000 - 11,400,0
150,000) x 80%] 00
150,0 11,550,0
Cost of sales without profit 00 00
Estimated inventory, December 1,710,00
31 0

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