Intermediate Accounting 1 - Meeting 2

IUP-BA

Problem no 1

COCO Company uses the gross profit method to estimate inventory for monthly reportingpurposes.
Presented below is information for the month of March.

Inventory, 1 march 400,000

Purchases 500,000
Freight in 50,000
Sales 1,100,000
Sales return 100,000
Purchase discount 50,000

Compute the estimated inventory at March 31, assuming that the gross profit is

a) 25% of sales

Beginning Inventory $400,000

Purchases (at cost) $500,000
Purchases discount ($50,000)
Freight In $50,000
Goods available (at cost) $900.000
Sales (at selling price) $1,100,000
Sales return ($100,000)
Net sales $1,000,000
Less gross profit (25% of ($250,000)
1,000,000)
Sales (at cost) ($750,000)
Approximate inventory on $150,000
march 31

b) 25% of cost

( 1+0.25
0.25
)= 15 =0.20=20 %
Beginning Inventory $900,000
Purchases (at cost) $500,000
Purchases discount ($50,000)
Freight In $50,000
Goods available (at cost) $900.000
Sales (at selling price) $1,100,000
Sales return ($100,000)
 Net sales $1,000,000
Less gross profit (20% of ($200,000)
1,000,000)
Sales (at cost) ($800,000)
Approximate inventory on $100,000
march 31

Problem no 2

ASUS inc. uses the retail inventory method to estimate ending inventory for its monthly financial
statements. The following data pertain to a single department for the month of October 2022.

Cost Retail
Beg. Inventory, oct 1 $50,000 $70,000
Purchase 280,000 431,000
Freight in 20,000
Purchase return 10,000 6,000
Additional markups 9,000
Markup cancellations 4,000
Markdowns (net) 3,000
Normal spoilage 7,000
sales 400,000

Prepare a schedule computing estimate retail inventory using the following methods:

(1) Conventional

Cost Retail Cost retail%

Beg. inventory $50,000 $70,000
Purchase 280,000 431,000
Freight in 20,000
Purchase return (10,000) (6,000)
Markup net 5,000
Current years additional 290,000 430,000
Goods available for sales 340,000 500,000 340,000 / 500,000
=0.68
Markdowns, net (3,000)
Normal spoilage (7,000)
sales (400,000)
Ending inventory at retail 90,000

Ending inventory cost

90,000 x 68 %=61,200
(2) Cost
 Cost Retail Cost retail%
Beg. inventory $50,000 $70,000
Purchase 280,000 431,000
Freight in 20,000
Purchase return (10,000) (6,000)
Markup net 5,000
Markdowns, net (3,000)
Current years additional 290,000 427,000
Goods available for sales 340,000 497,000 340,000 / 497,000
=0.684
Normal spoilage (7,000)
sales (400,000)
Ending inventory at retail 90,000

Ending inventory cost

90,000 x 68,4 %=61,560

Problem no 3

Opportunity Company lost most of its inventory in a fire in December just before the year-endphysical
inventory was taken. The company’s books disclosed the following.

Beginning inventory $200,000

Purchase for the year $400,000
Purchase return $20,000
sales $600,000
Sales return $30,000
Rate of gross margin on net sales 40%

Merchandise with a selling price of $21,000 remained undamaged after the fire. Damaged merchandise
with an original selling price of $15,000 had a net realizable value of $5,400.

Question

Compute the amount of the loss because of the fire, assuming that the company had no insurance
coverage.

Answers:

Beginning Inventory 200,000

Purchase 400,000
600,000
Purchase return (20,000)
Goods available (at cost) 580,000
Sales revenue 600,000
Sales return (30,000)
Net sales 570,000
Less: Gross profit (40% x 570,000) (228,000) 342,000
Estimate ending inventory 238,000
(unadjusted for damage)
Less: goods on hand – (12,600)
undamaged (at cost) (21,000 x 1-
40%)
Less goods on hand – undamaged (5,400)
(at NRV)
Fire loss on inventory 220,000