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Baguio Davao
DE GUZMAN Bldg. 18 LEGARDA Road Baguio City 3/F GCAM Bldg. Monteverde St. Davao City
((074) 6200710/0967-3847348 (0917-1332365

FINANCIAL ACCOUNTING & REPORTING PROF. MICHAEL F. TIU

WEEK 5 OCTOBER 2022 BATCH

INVENTORY ESTIMATION

1. SittieCompany uses the gross profit method to estimate inventory for monthly reporting
purposes. Information for July are as follows:
Inventory, May 1 P 350,000 Sales P 810,000
Purchases 620,000 Sales discount 35,000
Freight-in 45,000 Sales returns 25,000
Purchase discounts 11,000
Purchase returns 9,000
a) Estimated inventory at May 31, assuming that profit rate is 25% of cost 367,000
b) Estimated inventory at May 31, assuming that profit rate is 25% of sales 406,250

2. Meta Company requires an estimate of the cost of goods lost by fire on March 21. Merchandise
on hand on January 1 was P1,050,000; Purchases since January 1 were P1,420,000; freight-in,
P45,000; purchase discount and allowances, P25,000. Sales are made at a mark-up of 30% and
totaled P1,858,500 to March 21, discounts availed of up to that date amounted to P50,500. Goods
costing P200,000 were left undamaged by the fire; the remaining goods were destroyed and were
sold for scrap for P45,000.
a) Estimated cost of inventory at the time of the fire 1,060,385
b) Cost of inventory destroyed by the fire 860,385
c) Amount to be reported as loss due to fire 815,385

3. On August 15, 2022, Typhoon Domeng damaged a warehouse of Helen Company. The entire
inventory and many accounting records stored in the warehouse were completely destroyed.
Although the inventory was not insured, a portion could be sold for scrap. Through the use of
off-site records, the following data are assembled:
Inventory, January 1 P 550,000
Purchase, January 1 – August 15 1,480,000
Cash sales, January 1 – August 15 235,000
Collection of accounts receivable, January 1 – August 15 2,100,000
Accounts receivable, January 1 195,000
Accounts receivable, August 15 265,000
Salvage value of inventory 20,000
Gross profit rate 20%
The loss to be reported as a result of Typhoon Domeng is 86,000

4. On May 17, it was discovered that a material amount of inventory had been stolen. A physical
count discloses that P45,000 of merchandise was on hand as of May 17. The following data is
available from the accounting records
Inventory, January 1 P 85,000
Purchases, Jan 1 – May 17
(includes P4,000 goods in-transit FOB shipping point,
May 16, received May 19) 120,000
Sales (goods delivered to customers), Jan 1 – May 17 181,250
Carol Company’s mark-up rate has averaged 25%
Estimate the amount of loss due to theft 11,000
 5. SMDC Company lost most of its inventory in a fire in December just before the year-end
physical inventory was taken. Corporate records disclosed the following: beginning inventory,
P1,250,000; purchases, P3,750,000; purchase returns, P215,000; sales, P5,750,000; sales returns,
P140,000. SMDC Company’s profit rate has averaged 25% during the past few years. It is
estimated that the year-end inventory would have been subject to a normal 5% write-down for
obsolescence. Merchandise with a selling price of P 100,000 remained undamaged after the fire,
and the damaged merchandise has a salvage value of P 45,000. obsolescence loss - 28,875
The estimated fire loss incurred by SMDC Company is 432,375 end inventory - 71, 250

6. On December 31, 2022, Terranova Company had a fire which completely destroyed the goods in
process inventory and 20% of the finished goods.
After the fire, a physical inventory was taken: Raw materials were valued at P1,100,000, Finished
goods at P1,500,000 and factory supplies at P150,000 on December 31, 2022.
The January 1, 2022 inventory balances were as follows:
Finished goods P 2,100,000
Goods in process 500,000
Raw materials 450,000
Supplies 350,000
Data for the year 2022 were as follows:
Sales, P4,500,000; Purchases, P1,500,000; Freight-in, P150,000; Direct labor, P1,200,000;
Manufacturing overhead 40% of direct labor; Average profit rate 30%
The estimated cost of the goods in process on December 31, 2022 that were completely
destroyed by the fire is 255,000

7. Humble Company reports the following data for the month of April
Cost Retail
Beginning P 375,000 P 525,000
Purchases 1,890,000 2,835,000
Freight-in 60,000
Purchase returns 20,000 30,000
Purchase discounts 15,000 20,000
Transfer – in 240,000 285,000
Transfer – out 110,000 130,000
Freight – out 75,000
Mark ups 90,000
Mark up cancellation 20,000
Markdown 30,000
Markdown cancellation 18,000
Sales 3,300,000
Sales discounts 60,000
Sales returns 90,000
Employee discounts 45,000
Loss due to shrinkage 35,000
Compute the estimated inventory at cost under
159,508 a. Conservative (lower of cost and NRV) b. Average 160,051
158,934 c. FIFO d. LIFO 166,429
8. Dwaine Company uses the retail inventory method to estimate its inventory for interim statement
purposes:
Cost Retail
Inventory, January 1 P 820,000 P 1,262,800
Net Purchases 2,280,000 3,607,200
Net mark-ups 450,000
Net markdowns 320,000
Sales 4,350,000
Sales return 300,000
Employee discount 100,000
Sales discount 80,000
Abnormal losses 90,000 150,000
Normal losses 50,000
The estimated inventory and cost of sales under average-retail method are 403,402 and 2,606,598

9. Presented below is information related to Hershey Company

Cost Retail
Inventory, 12/31/2022 P 250,000 P 390,000
Purchases 914,500 1,460,000
Purchase returns 60,000 80,000
Purchase discounts 18,000 -
Gross Sales - 1,460,000
Sales returns - 97,500
Markups - 120,000
Markup cancellations - 40,000
Markdowns - 45,000
Markdown cancellations - 20,000
Freight-in 79,000 -
Employee discounts granted - 8,000
Loss from breakage (normal) - 2,500
The estimated inventory and cost of sales under FIFO-retail method are 228,367 and 877,133

10. The records for Ferrero Department are summarized below for the month of January:
Inventory, January 1, at retail, P25,000; at cost P17,000; Purchases in January, at retail, P137,000;
at cost, P86,500; Freight-in, P7,000; Purchase returns, at retail, P9,200; at cost, P3,000; Purchase
discounts and allowances, P2,200; Transfers in from another department., at retail, P13,000; at
cost, P9,200; transfers out to another department at retail, P9,600; at cost P6,200 Net mark-ups,
P8,000; Net markdowns, P4,000; inventory losses due to normal breakage, at retail, P400; Sales at
retail, P85,000; Sales returns, P2,400; sales discounts P1,100; employee discounts P3,000
The inventory for Ferrero Department as of January 31, under
(a) conservative 48,939 (b) average 50,161 (c) FIFO 50,107

/mft