Mindanao State University

College of Business Administration and Accountancy

INVENTORY ESTIMATION
Practical Accounting 1 Pre-review Program

PROBLEM 1: On May 6, 2013, a flashflood caused damage to the PROBLEM 5: The work in process inventory of San Marino Company
merchandise stored in the warehouse of Rome Company. You were were completely destroyed by fire on June 1, 2011. You were able to
asked to submit an estimate of the merchandise destroyed in the establish physical inventory figures as follows:
warehouse. The following data were established: 1/1/2011 6/1/2011
A. Net sales for 2012 were P800,000 matched against cost of Raw materials P 60,000 P 120,000
P560,000. Work in process 200,000 –
B. Merchandise inventory, January 1, 2013 was P200,000, 90% Finished goods 280,000 240,000
of which was in the warehouse and 10% in the downtown Sales from January 1 to May 31 were P546,750. Purchases of raw
showrooms. materials were P200,000 and freight on purchases, P30,000. Direct
C. For January 1, 2013 to date of flood, you ascertained that the labor during the period was P160,000. It was agreed with insurance
invoice value of purchases, all of which were stored in the adjusters that an average gross profit rate of 35% based on cost be used
warehouse, P100,000; freight inward, P4,000; purchases and that direct labor cost was 160% of factory overhead.
returned, P6,000.
6. The work in process inventory destroyed by fire is:
D. Cost of merchandise transferred from the warehouse to
showrooms was P8,000 and net sales from January 1 to May PROBLEM 6: A physical inventory taken on December 31, 2011
6, 2013, all of which were warehouse stock, were P320,000. resulted in an ending inventory of P1,440,000. San Salvador Company
E. There was no change in the gross profit rate adopted by the suspects some inventory may have been taken by employees. To
company in 2013. estimate the cost of missing inventory, the following were gathered:
1. What is the estimated merchandise destroyed by the flood? Inventory, December 31, 2010 P 1,280,000
Purchases during 2011 5,640,000
PROBLEM 2: The following information relates to Roseau, Inc. which Cash sales during 2011 1,400,000
accidentally met a fire on the night of January 19, 2013: Shipment received on December 26, 2011,
Inventory, July 1, 2012 P 51,600 included in physical inventory but not recorded
Purchases, July 1, 2012 to January 19, 2013 368,000 as purchases 40,000
Sales, July 1, 2012 to January 19, 2013 583,000 Deposits made with suppliers, entered as
Purchase returns 11,200 purchases. Goods were not received in 2011 80,000
Purchase discounts taken 5,800 Collections on accounts receivable, 2011 7,200,000
Freight in 3,800 Accounts receivable, January 1, 2011 1,000,000
Sales returns 8,600 Accounts receivable, December 31, 2011 1,200,000
The fire destroyed the entire inventory except for purchases in transit, Gross profit percentage on sales 40%
FOB shipping point of P2,000 and goods having selling price of P4,900 7. At December 31, 2011, what is the estimated cost of missing
that were salvaged from the fire. The average gross profit rate on net inventory?
sales is 40%.
2. Compute for the cost of inventory lost in the fire. PROBLEM 7: On December 24, 2011, a fire destroyed totally the raw
materials bodega of Sana’a Manufacturing Company. There was no
PROBLEM 3: San Jose Corporation was organized on January 1, purchase of raw materials from the time of the fire until December 31,
2010. On December 31, 2011, the corporation lost most of its inventory 2011:
in a warehouse fire just before the year end count of inventory was to 1/1/2011 12/31/2011
take place. Data records disclosed the following: Raw materials P 90,000 ?
2010 2011 Factory supplies 6,000 P 5,000
Beginning inventory P 0 P 1,020,000 Goods in process 185,000 210,000
Purchases 4,300,000 3,460,000 Finished goods 220,000 225,000
Purchase returns and allowances 230,600 323,000
Sales 3,940,000 4,180,000 The accounting records show the following data:
Sales returns and allowances 80,000 100,000 Sales P 1,200,000
On January 1, 2011, the corporation’s pricing policy was changed so Purchases of raw materials 400,000
that the gross profit rate would be 3% points higher than the one earned Purchases of factory supplies 30,000
in 2010. Salvaged undamaged merchandise was marked to sell at Freight in on raw materials 15,000
P120,000 while damaged merchandise marked to sell at P80,000 had an Direct labor 220,000
estimated realizable value of P18,000. Manufacturing overhead 75% of direct labor
Gross profit rate 35% of sales
3. How much is the inventory loss due to fire?
8. The cost of raw materials destroyed by fire was:
PROBLEM 4: San Juan Manufacturing began operations 5 years ago.
On August 13, 2011, a fire broke out in the warehouse destroying all PROBLEM 8: The records of Santiago were destroyed by fire at the
inventory and many records relating to the inventory. The information end of the current year. However, certain statistical data related to the
available is presented below (all sales and purchases are on account): income statement are available:
1/1/2011 8/13/2011 Interest expense P 20,000
Inventory P 143,850 Cost of goods sold 2,000,000
Accounts receivable 130,590 P 128,890 Sales discount 100,000
Accounts payable 88,140 122,850 The beginning inventory was P400,000 and decreased 20% during the
Collections on accounts year. Administrative expenses are 25% of cost of goods sold but only
receivable, 1/1 to 8/13 753,800 10% of gross sales. Four fifths of the operating expenses relate to sale
Payments to suppliers, 1/1 to 8/13 487,500 activities.
Goods out on consignment at 8/13 9. Ignoring income tax, what is the net income for the current year?
at cost 52,900
Summary on previous years’ sales follows: PROBLEM 9: On April 30, 2011, a fire damaged the office of Santo
2008 2009 2010 Domingo Company. The following balances were gathered from the
Sales P 626,000 P 705,000 P 680,000 general ledger on March 31, 2011:
Gross profit 187,800 225,600 231,200 Accounts receivable P 920,000
Inventory, 1/1/2011 1,880,000
4. What is the inventory loss suffered as a result of the fire if the Accounts payable 950,000
average gross profit rate is used? Sales 3,600,000
5. What is the inventory loss suffered as a result of the fire if the Purchases 1,680,000
trend in gross profit rate continues?
Additional information follows:

Prepared by: Mohammad Muariff S. Balang, CPA, Second Semester, AY 2013-2014 Page|1 of 2
 A. An examination of the April bank statement and canceled PROBLEM 12: The records of Seoul’s Department Store report the
checks revealed checks written during the period April 1 to 30 following data for the month of January:
as follows: Beginning inventory at cost P 440,000
Accounts payable, 3/31 P 240,000 Beginning inventory at sales price 800,000
April merchandise shipments 80,000 Purchases at cost 4,500,000
Expenses 160,000 Initial markup on purchases 2,900,000
Deposits during the same period amounted to P440,000 which Purchase returns at cost 240,000
consisted of collections from customers with the exception of Purchase returns at sale price 350,000
P20,000 refunds from a vendor for merchandise returned in Freight on purchases 100,000
April. Additional markup 250,000
B. Customers acknowledged indebtedness of P1,040,000 at April Markup cancellations 100,000
30. Customers owed another P60,000 that will never be Markdown 600,000
recovered. Of the acknowledged indebtedness, P40,000 may Markdown cancellations 100,000
prove uncollectible. Net sales 6,500,000
C. Correspondence with suppliers revealed unrecorded Sales allowance 100,000
obligations at April 30 of P340,000 for April merchandise Sales returns 500,000
shipment including, P100,000 for shipments in transit on that Employee discounts 200,000
date. Theft and other losses 100,000
D. The average gross profit rate is 40%. 17. Using the average retail inventory method, what is the inventory
E. Inventory with a cost of P260,000 was salvaged and sold for shortage?
P140,000. The balance of the inventory was a total loss.
PROBLEM 13: Singapore Company uses the LIFO retail method of
10. What is the amount of sales from January 1, 2011 to April 30, inventory valuation. The following information is available for the
2011? 2013:
11. What is the amount of purchases from January 1, 2011 to April Cost Retail
30, 2011? Beginning inventory P 1,200,000 P 1,500,000
12. What is the amount of fire loss to be recognized on April 30, Net purchases 4,200,000 5,900,000
2011? Net markups 200,000
PROBLEM 10: Sao Tome uses the retail inventory method. At the end Net markdowns 100,000
of the current year, Sao Tome suffered a fire loss that destroyed most of Net sales 5,500,000
its inventory. After the fire, only goods with a selling price of P125,000, 18. What is the estimated cost of ending inventory of Singapore
a cost of P100,000 and a net realizable value of P75,000 was salvaged. Company as of December 31, 2013?
The following information is available prior to the fire:
Cost Retail PROBLEM 14: A fire destroyed the Skopje Company’s warehouse
Beginning inventory P 1,100,000 P 2,200,000 causing damage to its inventories stored in the warehouse. The
Purchases 15,800,000 26,300,000 company uses the average retail inventory method in inventory
Freight in 540,000 estimation. In connection with this, the company’s accountant gathered
Purchase returns 600,000 1,000,000 the following information relating to its inventories:
Purchase allowances 300,000 Cost Retail
Departmental transfer in 400,000 800,000 Inventory, beginning 190,000 300,000
Markups 300,000 Purchase price 2,900,000 4,000,000
Cancelation of markdown 100,000 Purchase discount 50,000 100,000
Departmental transfer out 350,000 900,000 Purchase allowance 90,000 150,000
Markdowns 800,000 Purchase returns 60,000 120,000
Cancelation of markup 50,000 Freight in 20,000 30,000
Sales 24,700,000 Net markup 60,000
Sales returns 350,000 Net markdown 80,000
Sales discounts 200,000 Departmental transfer in 386,800 430,000
Sales allowances 100,000 Departmental transfer out 400,000 550,000
Employee discounts 600,000 Abnormal wastages 80,000 120,000
Normal wastage 5% of sales Normal wastages 100,000 120,000
Employee discounts 6,000 9,500
13. What is the estimated fire loss if Sao Tome applies the Sales discount 5,000 8,200
conservative retail approach? Sales allowances 21,000 32,150
14. What is the estimated cost of goods sold if Sao Tome applies the Sales returns 5,000 6,780
FIFO retail approach?
The company’s policy is to record sales adjustments directly to the sales
15. What is the estimated ending inventory if Sao Tome applies the
account. The sales account showed ending balance of P2,908,000 on the
average cost approach?
date of fire. Physical inventory conducted after the fire disclosed usable
PROBLEM 11: Sarajevo Company uses the FIFO retail inventory damaged goods which the company estimates can be sold at P100,000.
method since its inception in 2010. The company unfortunately met a Also, it is estimated that the company will incur P4,000 to sell the
fire in the middle of 2013 resulting into the total loss of its inventories. goods. The original cost of this goods amounted to P50,000.
The retail records reveal the following: 19. How much should the company recognize as loss on inventory
2012 Cost Retail fire?
Opening inventory P 556,800 P 928,000
Purchases 4,576,000 7,028,000 PROBLEM 15: Sofia Company has provided you the following data:
Net markup 42,000 Cost Retail
Net markdown 30,000 Beginning inventory P160,000 P 400,000
Sales 6,840,000 Purchases 2,800,000 3,200,000
2013 Cost Retail Freight in 40,000
Purchases P 2,380,000 P 3,406,000 Markup 300,000
Net markup 28,000 Markdown 160,000
Net markdown 34,000 Markup cancelation 30,000
Markdown cancelation 40,000
Sales 900,000
Sales 3,000,000
16. Determine the estimated inventory fire loss of Sarajevo Physical inventory at year-end 500,000
Company in 2013. Estimated normal shrinkage 4% of sales
20. Assuming the use of the average retail inventory method, how
much is the inventory shortage?

Prepared by: Mohammad Muariff S. Balang, CPA, Second Semester, AY 2013-2014 Page|2 of 2