Problem 19-1 (AICPA Adapted)
Lin Company sells its merchandise at a gross profit of 30%. On June 30, 2011, all of Lin's inventory was destroyed by fire.
The following figures pertain to Lin's operations for the six months ended June 30, 2011:
Net sales 8,000,000
Beginning inventory 2,000,000
Net purchases 5,200,000
What is the estimated cost of the destroyed inventory?
a. 4,800,000
Goods available for sale 7,200,000
Less: Cost of sales (8,000,000 x 70%) (5,600,000)
Ending inventory destroyed by fire 1,600,000
In the absence of any contrary statement, the gross profit rate is based on sales. Thus, if the gross profit rate is 30% on sales, the cost ratio is 70%.
Problem 19-2 (AICPA Adapted)
The following information appears in Olivia Company's records for the year ended December 31,2011:
Inventory, January 1 650,000
On December 31,2011, a physical inventory revealed that the ending inventory was only P420,000.
The gross profit on sales has remained constant at 30% in recent years. Olivia suspects that some inventory may have been pilfered by one of the entity's employees. On December 31,2011, what is the estimated cost of missing inventory?
The sales discounts are ignored for purposes of estimating inventory under the gross profit method.
Inventory - January 1 650,000
Purchases 2,300,000
Purchase returns (80,000)
Freight In 60,000
GOODS AVAILABLE FOR SALE 2,930,000
Cost of sales ( 70% × 3,370,000 ) (2,359,000)
Inventory - December 31 571,000
Physical inventory - December 31 (420,000)
COST OF MISSING INVENTORY 151,000
Problem 19-3 (AICPA Adapted)
On October 31,2011, a flood at Pamel Company's only warehouse caused severe damage to its entire inventory.
Based on the recent history, Pamela has a gross profit of 25 percent of sales.
The following information is availabe from Pamela's records for ten months ended October 31, 2011:
Inventory - January 1 520,000
A physical inventory disclosed usable damaged goods which Pamela estimates can be sold for P70,000.
Using the gross profit method, what is the estimated cost of goods sold for the ten months ended October 31,2011?
a. 3,360,000
Cost of goods sold (75% x 5,200,000) 3,900,000
Problem 19-4 (AICPA Adapted)
On December 31,2011, a fire at Brock Company's warehouse caused serve damage to its entire inventory.
Brock Company has a gross profit of 30% on cost. The following data are available for nine months ended September 30, 2011:
Inventory at January 1 1,100,000
Net purchases 6,000,000
Net sales 7,280,000
A physical inventory disclosed usable damaged goods which can be sold for P 100,000.
What is the estimated cost of goods sold for the nine months ended September 30, 2011?
a. 5,500,000 b. 4,970,000
Like sales discounts, sales allowances are ignored in determining net sales under the gross profit method.
c. 5,096,000 d. 5,600,000
Solution 19-4 Answer d
Cost of Goods sold ( 7,280,000 / 130% ) 5,600,000
Problem 19-5 (AICPA Adapted)
The following information is available for Tonette Company for the current year:
Net sales 3,600,000
Freight In 90,000
Purchase discounts 50,000
Ending Inventory 240,000
The gross margin is 40% of sales. What is the cost of goods available for sale?
a. 1,680,000
Cost of goods available for sale 2,400,000
Problem 19-6 (IAA)
On the night of September 30, 2011, a fire destroyed most of the merchandise inventorry of Sonia Company.
All goods were completely destroyed except for partial damaged goods that normally sell for P100,000 and that had an estimated net realizable value of P25,000 and undamaged goods that normally sell for P60,000.
The following data are available:
Inventory, January 1
Net purchases, January 1 through September 30 Net sales, January 1 through September 30
Total '2010
Net sales 9,000,000 5,000,000
Cost of sales 6,750,000 3,840,000
Gross Income 2,250,000 1,160,000
What is the estimated amount of fire loss on September 30, 2011?
a. 700,000 b. 615,000 c. 630,000 d. 580,000
Solution 19-6 Answer c
Average gross profit rate ( 2,250,000/9,000,000 ) 25%
Inventory - January 1 660,000
Net purchases 4,240,000
Goods available for sale 4,900,000
Cost of sales ( 5,600,000 × 75% ) (4,200,000)
Inventory - September 30 700,000
Less: Undamaged goods ( 60,000 × 75% ) 45,000
Realizable value of damaged goods 25,000 70,000
Fire loss 630,000
Problem 19-7 (IAA)
Cool Air Company lost 50% of its inventory by fire on December 31, 2011. No inventory had been taken on December 31, 2011. The following profit and loss data are available:
2011 2010
Inventory - January 1 1,040,000 840,000
Purchases 3,600,000 2,876,000
Purchase returns 240,000 140,000
Sales 4,060,000 3,900,000
Sales Returns 60,000 100,000
What is the value of the inventory destroyed by fire?
a. 1,600,000 b. 1,760,000
c. 800,000 d. 880,000
Solution 19-7 Answer c
Sales, net 2009 and 2010 7,400,000
Cost of sales:
Average gross profit rate ( 2,220,000/7,400,000 ) 30%
Inventory - January 1, 2011 1,040,000
Net purchases - 2011 3,360,000
Goods available for sale 4,400,000
Cost of sales ( 70% × 4,000,000 ) (2,800,000)
Inventory - December 31, 2011 1,600,000
Fire loss ( 50% × 1,600,000 ) 800,000
Problem 19-8 (IAA)
Beyonce Company sells merchandise on a consignment basis to dealers . The selling price of the merchandise averages 25% above cost. The dealer is paid a 10% commission of the sales price for all sales made. All dealer sales made on cash basis. The following consignment activities occured during 2011:
Manufacturing cost of goods shipped on consignment Sales price of merchandise sold by dealers
Payments remitted by dealers after deducting commission
What is the gross profit on sales?
a. 2,400,000 b. 1,920,000 c. 1,700,000 d. 1,220,000
Solution 19-8 Answer b
Sales 9,600,000
Cost of sales ( 9,600,000/ 125% ) 7,680,000
Gross profit 1,920,000
Problem 19-9 (AICPA Adapted)
Steven Company began operations in 2011. For the year ended December 31, 2011, Steven made availbale the following information:
Total merchandise purchases for the year 7,000,000
Merchandise inventory on December 31 1,400,000
Collection from customers 4,000,000
All merchandise was marked to sell at 40% above cost. All sales are on a credit basis and all receivables are collectible. What is the balance of accounts receivable on December 31, 2011?
a. 1,000,000
Inventory - December 31 (1,400,000)
Cost of goods sold 5,600,000
Markup on cost (40% x 5,600,000) 2,240,000
Sales (140% x 5,600,000) 7,840,000
Collections from customers (4,000,000)
Accounts receivable - December 31 3,840,000
Problem 19-10 (AICPA Adapted)
On December 31, 2011, Empress Company had a fire which completely destroyed the goods in process inventory. After the fire a physical inventory was taken.
The raw materials were valued at P600,000, the finished goods at P1,000,000 and supplies at P100,000 on December 31, 2011. The inventories on January 1, 2011 consisted of the following:
Finished goods 1,400,000
Goods in process 1,000,000
What is the estimated cost of the goods in process on December 31, 2011 that wre completely destroyed by fire? Less: Raw materials - December 31 Raw materials used
Direct labor
Manufacturing overhead (50% x 800,000) Total manufacturing cost
Add: Goods in process - January 1 Total goods in process
Less: Goods in process - December 31 (SQUEEZE)
Cost of goods manufactured Add: Finished goods - January 1 Goods available for sale
Less: Finished goods - December 31 Cost of sales (70% x 3,000,000)
The amount of goods in process on December 31, 2011 is "squeezed" by simply working back from the cost of sales.
Problem 19-11 (AICPA Adapted)
In conducting an audit of Romy Company for the year ended June 30, 2011, the entity's CPA observed the physical inventory at an transaction date, May 31, 2011. The following information was obtained:
Inventory, July 1, 2010 875,000
Physical inventory, May 31, 2011 950,000
Sales for 11 months ended May 31, 2011 8,400,000
Sales for year ended June 30, 2011 9,600,000
Purchases for 11 months ended May 31, 2011 6,750,000
Purchases for year ended June 30, 2011 8,000,000
a. Shipments received in May and included in the physical inventory but recorded at June purchases
b. Shipments received in unsalable condition and excluded from physical inventory. Credit memos had not been received nor had chargebacks to vendors been recorded
Total at May 31, 2011
Total at June 30, 2011 (including the May unrecorded Chargebacks)
c. Deposit made with vendor and charged to purchases in April, 2011.
Product was shipped in July, 2011.
d. Deposit made with vendor and charged to purchases in May, 2011.
Product was shipped FOB destination, on May 29, 2011 and was included in May 31, 2011 physical inventory as goods in transit.
e. Through the carelessness of the receiving department a
June shipment was damaged by rain. This shipment was later sold in June at its cost of
1. What is the cost of goods for the month of June 2011?
a. 980,000 b. 960,000 c. 880,000 d. 780,000
2. What is the June 30, 2011 inventory?
a. 1,240,000 b. 1,140,000 c. 1,160,000
d. 1,340,000
Solution 19-11
Question 1 - Answer a
Physical inventory Purchases up to Purchases up to
May 31, 2011 May 31, 2011 June 30, 2011
Balances 950,000 6,750,000 8,000,000
a - 75,000
-b - (10,000) (15,000)
c - (20,000) (20,000)
d (55,000) (55,000)
-Adjusted 895,000 6,740,000 7,965,000
Inventory - July 1, 2010 875,000
Purchases up to May 31, 2011 6,740,000
Goods available for sale 7,615,000
Inventory - May 31, 2011 (895,000)
Cost of goods sold 6,720,000
Sales up to May 31, 2011 8,400,000
Cost of goods sold (6,720,000)
Gross profit 1,680,000
Rate (l1,680,000/8,400,000) 20%
Sales for June (9,600,000 - 8,400,000) 1,200,000
Cost of goods sold with profit (1,100,000x80%) 880,000
Cost of goods sold without profit 100,000
Cost of goods sold during June 2011 980,000
Question 2- Answer b
Inventory, July 1, 2010
Purchases for year ended June 30, 2011 (as adjusted) Goods available for sale
Less: Cost of goods sold
Sales with profit (9,500,000x80%) 7,600,000
Sales without profit 100,000
Inventory, June 30, 2011
Problem 19-12 (AICPA Adapted)
On April 30, 2011, a fire damaged the office of Amaze Company. The following balances were gathered
from the general ledger on March 31, 2011:
Accounts receivable 920,000
Inventory - January 1, 2011 1,880,000
Accounts payable 950,000
Sales 3,600,000
Purchases 1,680,000
● An examination of the April bank statement and canceled checks revealed checks written during the period April-30 as follows:
Accounts payable as of March 31 240,000
April merchandise shipments 80,000
Expenses 160,000
Deposits during the same period amounted to P440,000 which consisted of collections from customers with the exception of P20,000 refund from a vendor for merchandise returned in April.
● Customers acknowledged indebtedness of P1,040,000 at April 30. Customers owed another P60,000 that will never be recovered. Of the acknowledged indebtedness, P40,000 may prove uncollectible.
● Correspondence with suppliers revealed unrecorded obligations at April 30, of P340,000 for April merchandise shipment, including P100,000 for shipments in transit on that date.
● The average gross profit rate is 40%.
● Inventory with a cost of P260,000 was salvaged and sold for P140,000. The balance of the inventory was a total loss.
What is the fire loss on April 30?
a. 1,440,000 b. 1,300,000 c. 1,200,000 d. 1,340,000
Solution 19-12 Answer c
Accounts receivable - April 30 1,040,000
Writeoff 60,000
Collections from customers (440,000-20,000) 420,000
Total 1,520,000
Less: Accounts receivable - March 31 (920,000)
Sales for April 600,000
Sales up to March 31 3,600,000
Total Sales 4,200,000
Accounts payable - April 30 for April shipments 340,000
Payment for April merchadise shipments 80,000
Purchases of April 420,000
Purchases up to March 31 1,680,000
Total purchases 2,100,000
Inventory - January 1 1,880,000
Purchases 2,100,000
Purchase returns (20,000)
Goods available for sale 3,960,000
Cost of sales (4,200,000 x 60%) (2,520,000)
Inventory - April 30 1,440,000
Less: Goods in transit 100,000
Salvage value 140,000 (240,000)
Fire loss 1,200,000
The following information appears in Olivia Company's records for the year ended December 31,2011:
The gross profit on sales has remained constant at 30% in recent years. Olivia suspects that some inventory may have been pilfered by one of the entity's employees. On December 31,2011, what is the estimated
On October 31,2011, a flood at Pamel Company's only warehouse caused severe damage to its entire inventory.
The following information is availabe from Pamela's records for ten months ended October 31, 2011:
Using the gross profit method, what is the estimated cost of goods sold for the ten months ended October 31,2011?
On December 31,2011, a fire at Brock Company's warehouse caused serve damage to its entire inventory.
Brock Company has a gross profit of 30% on cost. The following data are available for nine months ended in determining net sales under the gross profit method.
On the night of September 30, 2011, a fire destroyed most of the merchandise inventorry of Sonia Company.
All goods were completely destroyed except for partial damaged goods that normally sell for P100,000 and that had an estimated net realizable value of P25,000 and undamaged goods that normally sell for P60,000.
660,000 4,240,000 5,600,000
'2009 '2008
3,000,000 1,000,000
2,200,000 710,000
800,000 290,000
2009 848,000 2,836,000 200,000 3,620,000 20,000
Beyonce Company sells merchandise on a consignment basis to dealers . The selling price of the merchandise averages 25% above cost. The dealer is paid a 10% commission of the sales price for all sales made. All dealer
8,800,000 9,600,000 6,300,000
Steven Company began operations in 2011. For the year ended December 31, 2011, Steven made availbale
All merchandise was marked to sell at 40% above cost. All sales are on a credit basis and all receivables are
On December 31, 2011, Empress Company had a fire which completely destroyed the goods in process
The raw materials were valued at P600,000, the finished goods at P1,000,000 and supplies at P100,000
300,000
1,100,000 1,400,000 (600,000) 800,000 800,000 400,000 2,000,000 1,000,000 3,000,000
(1,300,000) 1,700,000 1,400,000 3,100,000 (1,000,000) 2,100,000
The amount of goods in process on December 31, 2011 is "squeezed" by simply working back from the
In conducting an audit of Romy Company for the year ended June 30, 2011, the entity's CPA observed the physical inventory at an transaction date, May 31, 2011. The following information was obtained:
75,000
10,000
15,000
20,000
55,000
100,000
Purchases up to June 30, 2011
8,000,000 -(15,000) (20,000)
-7,965,000
875,000 7,965,000 8,840,000
(7,700,000) 1,140,000
On April 30, 2011, a fire damaged the office of Amaze Company. The following balances were gathered