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# SAMPLE PROBLEMS FOR INVENTORY ESTIMATION AND LCNRV

PROBLEM 1
CONS Corporation is currently preparing its interim financial statements as of and for the interim period ended September 30, 2018. The beginning
inventory and the transactions that transpired from January 1, 2018 to September 30, 2018 are as follows:
Inventory, January 1 1,200,000
Purchases 11,600,000
Purchase returns 225,000
Purchase discounts 735,000
Freight in 520,000
Sales 14,095,000
Sales returns 200,000
Sales discounts 400,000
Employee discounts 105,000

Requirements:
1. If the company is using a gross profit rate based on sales of 30%,
a. What is the cost of goods sold for the interim period?
b. What is the estimated ending inventory as of the end of the interim period?
2. If the company is using a gross profit rate based on cost of 40%,
a. What is the cost of goods sold for the interim period?
b. What is the estimated ending inventory as of the end of the interim period?

PROBLEM 2
The warehouse of your client, NESS Corporation, was destroyed by fire on October 2, 2018. All of the inventory stored in the warehouse were also
destroyed, and you were engaged to estimate the fire loss related to the inventory.

Retrieved were the records pertaining to the inventory of your client, which shows the following information covering January 1 to September 30:
Purchases 1,766,500
Purchase discounts 22,500
Purchase returns 3,000
Sales 2,518,000
Sales returns 20,000
Sales discounts 8,000
Discounts granted to employees 2,000

You have determined that the appropriate gross profit rate to be applied in 2018 is based on the average gross profit rate for the past three years
(round gross profit rate to the nearest percentage; i.e. xx%). A summary of the previous performance of your client (for 2015, 2016, and 2017) is
presented below:

## 2015 2016 2017

Beginning inventory 424,830 516,630 525,520
Net purchases 1,322,300 1,433,890 1,500,430
Ending inventory 516,630 525,520 524,000
Sales 2,000,000 2,439,000 2,500,800

As of the date of fire, inventory costing P58,000 is still in transit, including a purchase made in October 1 for P12,000 which was not yet recorded by
your client. The term is FOB shipping point. Damaged inventory with cost of P3,000 was sold at cost after the fire. No other transactions occurred from
September 30 to October 2.

Requirements:
1. What is the average cost ratio?
2. What is the entity’s net sales for the purpose of determining the loss from the fire?
3. What is the estimated inventory as of October 2, 2018 before the fire?
4. What is the estimated loss on fire?

PROBLEM 3
SOUPIE, Inc., your audit client, is keeping a record of their inventory at cost with their corresponding selling price. Your client’s record revealed the
following information related to their inventory on September 30, 2018:
Cost Retail
Inventory, October 1, 2017 372,000 620,000
Purchases 3,110,000 4,760,000
Transportation in 55,000
Sales 4,872,000
Purchase return 27,000 45,000
Sales allowance 125,500
Purchase allowance 18,500
Sales returns 355,000
Sales discounts 322,250
Purchase discounts 15,960
Normal breakages 50,500
Abnormal breakages 200,000 308,000
Discounts granted to employees 75,500
Departmental transfer out 135,500 175,000
Departmental transfer in 125,500 165,000
Mark ups 290,000
Mark downs 283,000
Mark up cancellations 40,000
Mark down cancellations 40,000

The company reported inventories per a physical count conducted on September 30 at P225,000. You ascertained that the count conducted was

You used the retail inventory method of estimating ending inventory to check whether the amount per count is reasonable, and whether there is a
shortage in the inventory.

Note: round off percentages to whole number (for instance, 78.43% is 78%).

## Requirement: Compute for the cost of inventory shortage under

1. The conventional retail method
2. The average cost retail method
3. The FIFO retail method

PROBLEM 4
LORDS Corporation uses the lower of cost and net realizable value in presenting its inventory. Data regarding the company’s inventories are as follows:

## Finished Goods AAA BBB CCC

Cost 550,000 540,000 430,000
Selling price 675,000 620,000 820,000
Estimated cost to sell, as % of sales 20% 15% 15%

Work-in-process
Cost 240,000 188,000 320,000
Selling price 360,000 289,000 735,000
Estimated cost to complete 48,000 97,650 74,000
Replacement cost 208,000 168,000 375,000
Normal profit margin as % of selling price 25% 35% 40%

## Raw Materials - Item AAA A001 A002 A003

Cost 250,000 500,000 400,000
Current purchase price 250,000 480,000 375,000

## Raw Materials - Item BBB B001 B002 B003

Cost 400,000 300,000 200,000
Current purchase price 450,000 275,000 180,000

## Raw Materials - Item CCC C001 C002

Cost 375,000 450,000
Current purchase price 395,000 420,000

## The beginning balances of the following accounts are as follows:

Allowance for Inventory Writedown - Finished Goods 10,000
Allowance for Inventory Writedown – Work-in-Process 0
Allowance for Inventory Writedown - Raw Materials 40,000

Requirements:
1. What is the correct Finished Goods inventory to be reported at the balance sheet date for
a. AAA? b. BBB? c. CCC?
2. What is the correct Work-in-process inventory to be reported at the balance sheet date for
a. AAA? b. BBB? c. CCC?
3. What is the correct total raw materials for AAA to be reported at the balance sheet date?
4. What is the correct total raw materials for BBB to be reported at the balance sheet date?
5. What is the correct total raw materials for CCC to be reported at the balance sheet date?
6. What is the total loss on inventory write-down to be reported for the period?

PROBLEM 5
The balances of the inventories of Turon Corporation are presented below:
Dec. 31, 2017 Dec. 31, 2018
Finished goods 815,000 780,000
Work-in-process 340,000 354,000
Raw materials 200,000 185,000

The allowance for inventory writedown for the finished goods as of December 31, 2017 is at P15,000.
Audit notes:
 The entity purchased P1,200,000 worth of raw materials for 2018. 80% of the purchases were on account.
 P25,000 worth of raw materials are still in transit as of December 31, 2018. It was included in the ending inventory, but was only recorded
as purchase in January 5, 2019. The term is FOB shipping point.
 Factory overhead for the year total to P840,000, which is 20% more than the direct labor.
 The estimated selling price of the finished goods is P800,000 and the estimated cost to sell the goods is at 4% of its selling price.

Requirements:
1. What is the required allowance for inventory writedown on December 31, 2018?
2. Provided that any inventory writedown or reversal of inventory writedown is closed to cost of goods sold, how much is the cost of goods sold
for 2018?