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Chapter 8Inventory EstimationNAME: Date: Professor: Section: Score:QUIZ: On October 1, 20x1, the warehouse of ABC Co. and all inventories contained therein were damaged by flood. Off-site back up of data base shows the following information: Inventory, Jan. 1 10, Accounts payable, Jan. 1 3, Accounts...

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Chapter 8 Inventory Estimation NAME: Professor:

Section:

Date: Score:

QUIZ: 1. On October 1, 20x1, the warehouse of ABC Co. and all inventories contained therein were damaged by flood. Off-site back up of data base shows the following information: Inventory, Jan. 1 Accounts payable, Jan. 1 Accounts payable, Sept. 30 Payments to suppliers Freight-in Purchase returns Sales from Jan. to Sept. Sales returns Sales discounts Gross profit rate based on sales

10,000 3,000 2,000 50,000 500 500 80,000 5,000 2,000 30%

Additional information: Goods in transit as of October 1, 20x1 amounted to ₱1,000, cost of goods out on consignment is ₱1,200, and materials damaged by flood can be sold at a salvage value of ₱1,800. How much is the inventory loss due to the flood? a. 3,000 c. 4,400 b. 2,500 d. 4,900 2. On October 1, 20x1, the warehouse of ABC Co. and all inventories contained therein were razed by fire. Off-site back up of data base shows the following information: Inventory, Jan. 1 20,000 Net purchases 190,000 Net sales from Jan. to Sept. 240,000 Gross profit rate based on cost 25% Twenty percent of the inventory contained in the warehouse has been salvaged from the fire while half is partially damaged and can be sold as scrap at thirty percent of its cost. How much is the inventory loss due to the fire? a. 18,000 c. 9,000 b. 5,400 d. 11,700

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Use the following information for the next two questions: Presented below is information pertaining to ABC Co.: Cost Retail Inventory, January 1 21,750 35,000 Purchases 138,250 200,750 Freight-In 5,000 Purchase discounts 1,250 Purchase returns 13,000 21,500 Departmental Transfers-In (Debit) 2,500 3,750 Departmental Transfers-Out (Credit) 2,000 3,000 Markups 15,000 Markup cancellations 5,000 Markdowns 30,000 Markdown cancellations 7,500 Abnormal spoilage (theft and casualty 12,500 loss) 17,500 Sales 109,500 Sales returns 6,250 Sales discounts 2,500 Employee discounts 1,250 Normal spoilage (shrinkage and breakages) 500 3. How much is the ending inventory under the Average cost method? a. 60,750 b. 60,000 c. 61,050 d. 62,400 4. How much is the ending inventory under the FIFO cost method? a. 60,750 b. 60,000 c. 61,050 d. 62,400

“Blessed is the one who perseveres under trial because, having stood the test, that person will receive the crown of life that the Lord has promised to those who love him.” (James 1:12) - END -

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SOLUTIONS: 1. A Solution: Accounts payable 3,000 Payments to suppliers

50,000

Ending balance

Beginning balance

49,000

Net purchases (squeeze)

2,000

The computed “Gross purchases” is extended to the “Inventory” T-account as follows: Beginning balance Net purchases Freight-in

Inventory 10,000 49,000 500 52,500 7,000

Cost of goods sold * End. bal. (squeeze)

*“Cost of goods sold” is computed as follows: Gross sales Sales returns Net sales Multiply by: Cost ratio (100% - 20% GPR based on sales) Cost of goods sold

80,000 (5,000) 75,000 70% 52,500

Inventory, Sept. 30 (see T-account above) Goods in transit Goods out on consignment Salvage value Inventory loss due to flood

7,000 (1,000) (1,200) (1,800) 3,000

2. D Solution: Jan. 1 Net purchases

Inventory 20,000 190,000

192,000 18,000

COGS (240K x 100/125) Sept. 30 (squeeze)

Inventory, Sept. 30 Salvaged (20% x 18,000)

18,000 (3,600)

Partially damaged (50% x 18,000 x 30%) Loss from fire

(2,700) 11,700

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3. B Solution: Inventory, January 1 Net purchases (a) Departmental transfers-in (debit) Departmental transfers-out (credit) Net markups (15,000 – 5,000) Net markdowns (30,000 – 7,500) Abnormal spoilage (theft and casualty loss) Total goods available for sale Net sales (b)

Cost 21,750 129,000 2,500 (2,000)

(12,500) 138,750

Ending inventory at retail

Retail 35,000 179,250 3,750 (3,000) 10,000 (22,500) (17,500) 185,000 (105,000) 80,000

(a) Purchases Freight-In Purchase discounts

Cost 138,250 5,000 (1,250)

Retail 200,750 -

Purchase returns

(13,000)

(21,500)

Net purchases

129,000

179,250

The Average cost ratio is computed as follows: Cost ratio (Average cost method)

Average cost ratio

=

Total goods avail. for sale at cost Total goods avail. for sale at sales price or at retail

= (138,750 ÷ 185,000) = 75%

(b) Net sales is computed as follows: Sales 109,500 Sales returns (6,250) Employee 1,250 discounts Normal spoilage 500 Net sales 105,000 The ending inventory at cost is estimated under the Average cost method as follows: Ending inventory at retail (or at selling price) 80,000 Multiply by: Average cost ratio 75% Ending inventory at cost 60,000

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4. D Solution: Based on the solutions from the previous problem, the cost ratio under the FIFO cost method is computed as follows: (d) The FIFO cost ratio is computed as follows: Cost ratio (FIFO cost method)

FIFO cost ratio

=

TGAS at cost less beg. inventory at cost TGAS at retail less beg. inventory at retail

= [(138,750 – 21,750) ÷ (185,000 – 35,000)] = 78%

The ending inventory at cost is estimated under the FIFO cost method as follows: Ending inventory at retail 80,000 Multiply by: FIFO cost ratio 78% Ending inventory at cost 62,400...