INTERMEDIATE ACCOUNTING 1

CHAPTER 13 - GROSS PROFIT METHOD

Gecelle Company
Gecelle company reported the following information during the current year:

Beginning Inventory 500,000

Net purchases 2,500,000
Net sales 3,200,000

A physical count at year-end resulted in an inventory of P575,00. The gross profit had remained
constant at 25%. The entity suspected that some inventory may have been taken by a new
employee.

What amount should be reported as estimated cost of missing inventory at year-end?

Ans: d - 25,000
Sol:

Beginning inventory 500,000

Net purchases 2,500,000
Goods available for sale 3,000,000
Cost of goods sold (75% x 3.2M) (2,400,000)
Ending inventory 600,000
Physical Inventory 575,000
Missing inventory 25,000

Lin Company
Lin Company sold merchandise at a gross profit of 30%. On June 30, all of the inventory was
destroyed by fire.
The entity provided the following information for the six months ended June 30:

Net sales 8,000,000

Beginning Inventory 2,000,000
Net purchases 5,200,000

What amount should be reported as estimated cost of the destroyed inventory?

Ans: c - 1,600,000
Sol:

Beginning inventory 2,000,000

Net purchases 5,200,000
 Goods available for sale 7,200,000
Less: Cost of sales (8M x 70%) (5,600,000)
Ending inventory 1,600,000
In the absence of any contrary statement, the gross profit rate is based on sales. Thus, if the
gross profit is 30% on sales, the cost ratio is 70%.

Avarice Company
Avarice company has a recent gross profit history of 40% of net sales.
The following data are available from the accounting records for the three months ended in
March 31:

Inventory - January 1 650,000

Purchases 3,200,000
Net sales 4,500,000
Purchase return ll75,000
Freight in 50,000

Using the gross profit method, what amount should be reported as cost of inventory on March
31?
Ans: a - 1,125,000
Sol:

Inventory, Beginning 650,000

Purchases 3,200,000
Freight In 50,000
3,250,000
Less: Purchases Return (75,000) 3,175,000
Goods available for sale 3,825,000
Less: Cost of sales
Net sales 4,500,000
Multiply by: Cost ratio 50% 2,700,000
Ending Inventory 1,125,000

Celibacy Company
Celibacy provided the following information for the current year:

Beginning Inventory 650,000

Purchases 2,300,000
Purchase Returns 80,000
Freight In 60,000
Sales 3,400,000
Sales Discounts 20,000
 Sales Returns 30,000

At year-end, a physical inventory revealed that the ending inventory was only P420,000. The
gross profit on sales has remained constant at 30%. The entity suspects that some inventory
may have been pilfered by one of the employees.

What amount should be reported as cost of missing inventory at year-end?

Ans: a - 151,000
Sol:

Sales 3,400,000
Sales Returns (30,000)
Net sales 3,370,000

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% x 3,370,000) (2,359,000)
Inventory - December 31 571,000
Physical inventory - December 31 420,000
Cost of missing inventory 151,000

Delectable Company
At year-end, Delectable Company experienced a storm surge which caused severe damage to
the entire inventory. Based on recent history, the entity had a gross profit of 25% on sales.
The following information is available for the current year:

Beginning inventory 520,000

Purchases l 4,120,000
Purchase returns 60,000
Sales 5,600,000
Sales returns 400,000
Sales allowances 100,000

What is the estimated cost of goods sold for the current year?
Ans: c - 3,900,000
Sol:
 Sales 5,600,000
Sales Returns (400,000)
Net sales 5,200,000

Cost of goods sold (75% x 5,200,000) 3,900,000

Like sales discounts, sales allowances are ignored in determining net sales under the gross
profit method.

Elusive Company
On September 30, a fire at Elusive company’s only warehouse caused sever damaged to the
entire inventory.
Based on recent history, the entity has a gross profit of 30% on cost of goods sold.
A physical inventory disclosed usable damaged goods which can be sold to a jobber for
P100,000.

The following information is available from the records for the nine months ended September
30:

Inventory - January 1 1,100,000

Purchases 6,000,000
Net sales 7,280,000

What is the estimated amount of fire loss?

Ans: b - 1,400,000
Sol:

Cost of goods available for sale (1.1 M + 6M) 7,100,000

Cost of goods sold (7.28 M / 130%) 5,600,000
Ending Inventory 1,500,000
Net Realizable Value of damaged goods (100,000)
Fire loss 1,400,000

Karen Company
Karen Company reported the following information for the current year:

Beginning inventory 5,000,000

Purchases l 26,000,000
Freight in 2,000,000
Purchase returns and allowances 3,500,000
Purchase discounts 1,500,000
Sales iii 40,000,000
Sales returns 3,000,000
Sales allowances 500,000
Sales discounts i 1,000,000

A physical inventory taken at year-end resulted in an ending inventory costing P4,000,000.

At year-end, unsold goods out on consignment with selling price of P1,000,000 are in the hands
of a consignee.
The gross profit was 40% on sales.

1. What is the cost of goods available for sale?

Ans: a - 28,000,000
Sol:

Beginning Inventory 5,000,000

Purchases 26,000,000
Freight In 2,000,000
Purchase returns and allowances (3,500,000)
Purchase discounts (1,500,000)
Cost of goods available for sale 28,000,000

2. What is the cost of goods sold?

Ans: b - 22,200,000
Sol:

Sales 40,000,000
Sales Returns (3,000,000)
Net sales 37,000,000
Multiply by cost ratio 60%
Cost of goods sold 22,200,000
Net sales 100%
Gross profit on sales (40%)
Cost ratio 60 %
Sales allowances and sales discounts are ignored in determining net sales under the gross
profit method.

3. What is the estimated cost of inventory shortage?

Ans: c - 1,200,000
Sol:
 Cost of goods available for sale 28,000,000
Cost of goods sold (22,200,000)
Ending inventory 5,800,000
Physical count l (4,000,000)
Cost of goods out on consignment
(1M x 60%) (600,000)
Cost of inventory shortage 1,200,000

Claire Company
On December 31, 2020, a big fire caused severe damage to the warehouse of Claire company.
2020 2019
Beginning inventory 1,000,000 -
Purchases 8,000,000 5,600,000
Purchase return ll500,000 100,000
Sales 9,000,000 6,000,000

At the beginning of 2020, the entity changed the policy on the selling prices of the merchandise
in order to produce a gross profit rate of 5% higher than the gross profit rate in 2019.

Undamaged merchandise marked to sell at P500,000 was salvaged. Damaged merchandise

marked to sell at P100,000 had an estimated realizable value of P10,000.

What amount should be reported as inventory fire loss?

Ans: b - 1,840,000
Sol:

2019
Cost of goods available for sale
(0 + 5.6M - 100K) 5,500,000
Ending inventory 1,000,000
Cost of goods sold 4,500,000

Sales 6,000,000
Less: Cost of goods sold (4,500,000)
Gross profit 1,500,000

Gross profit rate on sales (1,500,000 / 6,000,000) 25%

+ 5%
Gross profit rate to be used in 2020 30 %

2020
Cost of goods available for sale
(1M + 8M – 500K) 8,500,000
 Cost of goods sold (9M x 70 %) l (6,300,000)
Ending inventory 2,200,000
Less : cost of undamaged merchandise
500,000 x 70 % (350,000)
NRV of damaged merchandise (10,000)
Inventory fire loss 1,840,000

Fearless Company
Fearless Company began operations at the beginning of current year. The following information
is available for the current year:

Total merchandise purchases 7,000,000

Ending inventory 1,400,000
Collections from customers 4,000,000

All merchandise is marked to sell at 40% above cost. All sales are credit sales and all accounts
are collectible.

What is the balance of accounts receivable at year-end?

Ans: d - 3,840,000
Sol:
Total merchandise purchases 7,000,000
Ending inventory (1,400,000)
5,600,000

Net Sales (5.6M x 140%) 7,840,000

Less: Collections from customers (4,000,000)
Accounts Receivable - December 31 3,840,000

Paragon Company
On September 30, 2020, a fire destroyed most of the merchandise inventory of Paragon
Company.
All goods were completely destroyed except for partially 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.

Inventory-January 1, 2020 660,000

Net purchases
Jan 1 - Sep 30 4,240,000
Net sales
Jan 1 - Sep 30 5,600,000

2019 2018 2017

 Net sales 5,000,000 3,000,000 1,000,000
Cost of goods sold 3,840,000 2,200,000 710,000

What is the amount of fire loss to be recognized on September 30,2020?

Ans: c- 630,000
Sol:

Historical :
Net sales (2017 to 2019) 9,000,000
COGS (2017 to 2019) l 6,750,000 75 % → cost ratio
Gross profit 2,250,000 25 % → GP rate

Beginning inventory 660,000

Net purchases l 4,240,000
Cost of goods available for sale l 4,900,000
Less : COGS
5,600,000 x 75 % 4,200,000
Ending inventory 700,000
Less :
Undamaged goods
60,000 x 75 % ( 45,000)
NRV of damaged goods ( 25,000)
Fire loss 630,000

Fairy Company
Fairy Company provided the following information:

2019 2020
Sales 7,500,000 4,500,000
Beginning inventory 1,260,000 -
Purchases 6,450,000 3,180,000
Freight in 350,000 220,000
Purchase discounts 90,000 45,000
Purchase returns 120,000 40,000
Purchase allowances 20,000 15,000
Ending inventory 2,355,000

What is the inventory on December 31, 2020?

Ans: a - 2,370,000
Sol:

2019 :
Beginning inventory 1,260,000
 Net purchases
(6.45M + 350K – 90K – 120K – 20K) 6,570,000
Cost of goods available for sale 7,830,000
Less : ending inventory 2,355,000
COGS 5,475,000

Sales 7,500,000
COGS 5,475,000 73% → cost ratio
Gross profit 2,025,000 27% → GP rate

2020
Beginning inventory 2,355,000
Net purchases (3.18M+ 220K - 45K - 40K -15K) 3,300,000
Cost of goods AFS 5,655,000
Less : COGS ( 4,500,000 x 73 % ) 3,285,000
Ending inventory 2,370,000

Unanimous Company
In December 31, 2020, Unanimous Company had a significant portion of inventory stolen.
The entity determined the cost of inventory not stolen to be P100,000.

2020 2019
Purchases 5,200,000 5,000,000
Purchase returns l 240,000 200,000
Sales 7,880,000 8,200,000
Sales returns and allowances 80,000 200,000
Beginning inventory 1,200,000 2,000,000

What is the estimated cost of the stolen inventory?

Ans: b - 600,000
Sol:

2019
Net sales (8,200,000 – 200,000) 8,000,000
COGS
Beginning inventory 2,000,000
Net purchases (5M - 200K) 4,800,000
Cost of goods AFS 6,800,000
Less: ending inventory 1,200,000 5,600,000 → cost ratio 70 %
Gross profit 2,400,000 → GP rate 30 %

2020
Beginning inventory 1,200,000
 Net purchases (5.2M - 240K) l 4,960,000
Cost of goods AFS l 6,160,000
Less : COGS
Net sales (7.88M - 80K) 7,800,000
X cost ratio 70 % 5,460,000
Ending inventory 700,000
Less : not stolen (100,000)
Stolen inventory 600,000

Wholesome Company
Wholesome Company sold merchandise on a consignment basis to dealers. The gross profit
was 25% above cost.

The dealer is paid a 10% commission of the sales price for all sales made. All dealer sales are
made on a cash basis.

The following consignment activities occurred during the current year:

Manufacturing cost of goods shipped on consignment 8,800,000

Sales price of merchandise sold by dealers 9,600,000
Payments remitted by dealers after deducting 6,300,000
commission

What was the gross profit on consignment sales?

Ans: b - 1,920,000
Sol:

Sales 9,600,000
COGS (9.6M /125%) 7,680,000
Gross profit 1,920,000

Regatta Company
On December 31, 2020, a fire broke out in the warehouse of Regatta Company destroying all
inventory. The following data are available for the current year:
January 1 December 31
Inventory 500,000
Accounts receivable 480,000 440,000

Accounts payable 400,000 500,000

Collection on accounts receivable 2,640,000
Payments to suppliers 1,600,000
Goods out on consignment at sales price 200,000
Salvage value of inventory 20,000
 2019 2018 2017
Sales 2,800,000 2,700,000 2,500,000
Gross profit 1,260,000 1,080,000 860,000

1. What amount should be reported as purchases for the current year?

Ans: a - 1,700,000
Sol:

A/P - Beginning 400,000

Less:Payments (1,600,000)
Purchases (SQUEEZE) 1,700,000
A/P - Ending 500,000

2. What amount should be reported as sales for the current year?

Ans: a - 2,600,000
Sol:

A/R - Beginning 480,000

Less:Collection (2,640,000)
Credit Sales (SQUEEZE) 2,600,000
A/R - Ending 440,000

3. What amount should be reported as inventory fire loss on December 31, 2020?
Ans: d- 500,000

GP rate :
GP 2017 to 2019 3,200,000
Divide by
Sales 2017 to 2019 8,000,000
GP rate 40 %

Beginning inventory 500,000

Purchases 1,700,000
Cost of goods AFS 2,200,000
Less : COGS
Sales x cost ratio
2,600,000 x 60 % 1,560,000
Ending inventory 640,000
Less : goods out on consignment
200,000 x 60 % (120,000)
SV of inventory damaged (20,000)
Inventory fire loss 500,000
Frenzy Company
At year-end, Frenzy Company had a fire which completely destroyed the goods in process
inventory. A physical inventory was taken after the fire.

December 31 January 1
Finished goods 4,500,000 6,000,000
Goods in process - 4,300,000
Raw materials 2,000,000 1,700,000
Factory Supplies 400,000 500,000

During the year, the entity reported sales P20,000,000, purchases P3,800,000, freight
P200,000, direct labor P5,000,000 and manufacturing overhead at 60% of direct labor. The
average gross profit rate is 30% on sales.

1. What amount should be reported as cost of raw materials used?

Ans: b - 3,700,000

2. What amount should be reported as total manufacturing cost?

Ans: c- 11,700,000

3. What amount should be reported as cost of goods sold?

Ans: d - 14,000,000

4. What amount should be reported as cost of goods in process inventory destroyed by fire?
Ans: a - 3,500,000
Sol:

Direct materials used

Raw materials inventory beginning 1,700,000
Raw materials purchases 3,800,000
Freight in 200,000 4,000,000
Available for use 5,700,000
Less : Raw materials, ending 2,000,000 3,700,000
Direct labor 5,000,000
Manufacturing overhead (5,000,000 x 60 %) 3,000,000

Total manufacturing cost 11,700,000

+ Goods in process beginning 4,300,000
Cost of goods placed in process 16,000,000
-Good in process ending 3,500,000 → destroyed by fire
Cost of goods manufactured 12,500,000

+ Finished goods beginning 6,000,000

Cost of goods AFS 18,500,000
-Finished goods ending 4,500,000
 COGS 14,000,000 → work back/upwards
Sales x cost ratio to get goods in process
20,000,000 x 70 % ending

Ultimate Company
In conducting an audit of Ultimate Company for the year ended June 30,2020, the CPA
observed the physical inventory at an interim date, May 31,2020, instead of at year end.
The following information was obtained from the general ledger.

Inventory, July 1,2019 875,000

Physical inventory, May 31,2020 950,000
Sales for 11 months ended May 31,2020 8,400,000
Sales for year ended June 30,2020 9,600,000
Purchases for 11 months ended May 31,
2020 before audit adjustments 6,750,000
Purchase for year ended June 30 , 2020
before audit adjustments 8,000,000

a. Shipments received in May and included in the

physical inventory but recorded as June purchases 75,000

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 31,2020 10,000

Total at June 30,2020, including the May
unrecorded chargebacks 15,000

c. Deposit made with vendor and charged to purchases

in April 2020. The product was shipped in July 2020. 20,000

d. Deposit made with vendor and charged to purchases

in May 2020. Product was shipped FOB destination,
on May 29,2020 and was included in May 31,2020
physical inventory as goods in transit 55,000

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 100,000
1. What is the amount of gross profit for the eleven months ended May 31, 2020?
Ans: a - 1,680,000
Sol:

Inventory 5/31/2020 Purchases 11 months Purchase for the year

950,000 ended 5/31/2020 Ended 6/30/2020
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 7/1/2019 875,000

Purchases 7/1/2019 to 5/31/2020
As adjusted 6,740,000
Cost of goods AFS 7,615,000
Inventory 5/31/2020 895,000
COGS 7/1/2019 to 5/31/2020 6,720,000

Sales 7/1/2019 to 5/31/2020 8,400,000

Less: COGS 7/1/2019 to 5/31/2020 6,720,000 80%
Gross Profit 1,680,000 20%

2. What is the amount of sales for the month of June?

Ans: b - 1,200,000
Sol:
Sales 12 months 7/1/2019 to 6/30/2020 9,600,000
Less: Sales 11 months 7/1/2019 to 5/31/2020 8,400,000
Sales in June 2020 1,200,000

3. What is the cost of goods sold for the month of June?

Ans: c - 980,000
Sol:
 Sales in June 1,200,000 → w/ profit 1,100,000
→ w/out profit 100,000

With profit Without profit

Sales 1,100,000 100,000
COGS 80% 880,000 + 100,000 = 980,000( total COGS)

4. What is the inventory on June 30, 2020?

Ans: d - 1,140,000
Sol:
Inventory 7/1/2019 875,000
Add: Purchases 12 mos adjusted 7,965,000
Cost of goods available for sale 8,840,000
Less: COGS
7/1/2019 to 5/31/2020 6,720,000
June 2020 980,000 7,700,000
Inventory 6/30/2020 1,140,000

Waterloo Company
On April 30,2020, a fire damaged the office of Dominica Company. The following balances were
gathered from the general ledger on March 31,2020:

Accounts receivable 920,000

Inventory – January 1 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 1 – 30:

Accounts payable as of March 31 240,000

April merchandise shipments 80,000
Expenses 160,000

Collection: 440,000 - 20,000 = 420,000

20,000 → purchase return
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.

A/R, end → 1,040,000

Written off → 60,000

● Correspondence with suppliers revealed unrecorded obligations at April 30 of P340,000

for April merchandise shipments, including P100,000 for shipments in transit on that
date.

A/P, end → 340,000

● The average gross profit rate is 40%.

Cost ratio → 60%

● Inventory with a cost of P260,000 was salvaged and sold for P140,000.
The balance of the inventory was a total loss.

1. What is the total amount of sales up to April 30?

Ans: a - 4,200,000
Sol:

A/P 3/31/2020 920,000

Add: Sales in April 600,000
Less: writeoff (60,000)
Collection (420,000)
A/P 4/30/2020 1,040,000

Total Sales
Up to March 30, 2020 3,600,000
April 2020 600,000
Total 4,200,000

2. What is the total amount of purchase up to April 30?

Ans: b - 2,100,000
Sol:

Accounts payable as of 4/30/2020 for April purchases 340,000

Add back: Payments for April purchases 80,000
Purchases in April 420,000
Add: Purchases up to March 1,680,000
Purchases up to April 2,100,000

3. What is the inventory on April 30?

Ans: c - 1,440,000

4. What is the fire loss to be recognized on April 30?

Ans: d - 1,200,000
Sol: (for 3 and 4)

Inventory, January 1 1,880,000

Purchases 2,100,000
Purchase Returns 20,000 2,080,000
Cost of goods AFS 3,960,000
Less: COGS
4.2M x 60% 2,520,000
Inventory, April 30 1,440,000
Less: Goods in transit (100,000)
SV of damaged goods (140,000)
Fire loss 1,200,000