PFA 1

Chapter 32 – Gross Profit Method

July Kristell I. Villanueva (Problem 32-1 – Problem 32-4)
Lyka A. Villas (Problem 32-5 – Problem 32-8)
Mary Jane G. Macaraig (Problem 32-9– Problem 32-10)

Problem 32-1 (AICPA Adapted)

Gecelle Company reported 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 P575,000. The gross profit had remained
constant at 25%. The entity suspected that some inventory may have been taken by a new
employee.

What is the estimated cost of missing inventory at year-end?

a. 100,000
b. 175,000
c. 225,000
d. 25,000

Solution:
Beginning inventory 500,000
Net purchases 2,500,000

Goods available for sale 3,000,000

Cost of goods sold (75% x 3,200,000) (2,400,000)

Ending inventory 600,000

Physical inventory 575,000

Missing Inventory 25,000

In the absence of any contrary statement, the gross profit rate is based on sales.

Thus, if the gross profit rate is 25% on sales, the cost ratio is 75%.
Problem 32-2 (AICPA Adapted)

Karen Company reported the following information for the current year:

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
Sales 40,000,000
Sales returns 3,000,000
Sales allowances 500,000
Sales discounts
1,000,000

A physical inventory taken at year-end resulted in an ending inventory of 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 goods available for sale?

a. 28,000,000
b. 31,000,000
c. 33,000,000
d. 29,500,000

2. What is the cost of goods sold?

a. 21,900,000
b. 22,200,000
c. 21,300,000
d. 24,000,000

3. What is the estimated cost of inventory shortage?

a. 1,800,000
b. 2,700,000
c. 1,200,000
d. 2,100,000

Solutions:
Question 1
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

Question 2
Sales 40,000,000
Sales return (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 rate on sales (40%)

Cost ratio 60%

Sales allowances and sales discounts are ignored in determining net sales under the gross profit
method.*

Question 3
Cost of goods available for sale 28,000,000
Cost of goods sold (22,200,000)

Ending inventory 5,800,000

Physical count (4,000,000)
Cost of goods out on consignment
(1,000,000 x 60%) ( 600,000)

Cost of inventory shortage 1,200,000

Problem 32-3 (AICPA Adapted)

At year-end, Pamela Company reported that a flood caused severe damage to the entire
inventory. Based on recent history, the entity had a gross profit of 25% of sales.

The entity provided the following information for the current year:

Inventory, January 1 500,000

Purchases 4,000,000
Purchase returns 200,000
Sales 5,600,000
Sales returns 400,000
Sales allowances 100,000
 1. What is the cost of goods sold for the year?
a. 4,160,000
b. 4,080,000
c. 3,900,000
d. 3,825,000

2. What is the cost of ending inventory damaged by flood?

a. 475,000
b. 400,000
c. 260,000
d. 220,000

Solutions:

Sales 5,600,000
Sales returns (400,000)

Net sales 5,200,000

Cost ratio (100% - 25%)

75%

Sales allowances are ignored in determining net sales under the gross profit method.

Goods available for sale 4,300,000

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

Ending inventory destroyed 400,000

Problem 32-4 (AICPA Adapted)

On September 30, Brock Company reported that a fire caused severe damage to the entire
inventory. The entity had a gross profit of 30% on cost.

The entity provided the following data for nine months ended September 30.

Inventory at January 1
Net purchases
Net sales

A physical inventory disclosed usable damaged goods which can be sold for P100,000.

1. What is the estimated cost of goods sold for the nine months ended September 30?
a. 5,500,000
b. 4,970,000
c. 5,096,000
d. 5,600,000

2. What is the estimated amount of fire loss?

a. 1,500,000
b. 1,400,000
c. 2,004,000
d. 1,964,000

Solutions:

Cost of goods sold (7,280,000 / 130%)

5,600,000

Sales ratio (100% + 30%) 130%

Inventory – January 1 1,100,000

Net purchases 6,000,000

Goods available for sale

7,100,000
Cost of goods sold (5,600,000)

Inventory – September 30 1,500,000

Realizable value of damaged goods (100,000)

Fire loss on inventory

1,400,000
Problem 32-5 (IAA)
 
At year-end, a storm surge damaged the warehouse of Braveheart Company. The entire
inventory and many accounting records were completely destroyed.

January 1 December 1

Inventory 1,500,000
Purchases 5,500,000
Cash Sales 900,000
Collection of accounts receivable 8,400,000
Accounts Receivable 700,000 1,100,000
Gross profit on sales 40%

What is the inventory loss from the storm surge?

a. 1,180,000
b. 1,720,000
c. 2,700,000
d. 2,260,000

Solution:

Collection of accounts receivable 8,400,000

Accounts Receivable – January 1 (700,000)
Accounts Receivable – December 31   1,100,000

Sales on Account 8,800,000

Cash sales      900,000
Total Sales   9,700,000

Inventory – January 1 1,500,000

Purchases   5,500,000
Goods available for sale 7,000,000
Cost of goods sold (9,700,000 x 60%) (5,820,000)
Inventory – December 31   1.180,000

Cost ratio (100%-40%) 60%

Problem 32-6 (IAA)

 
On the night of September 30,2019, a fire destroyed most of the merchandise inventory of Sonia
Company.

All good were completely destroyed except for partial damaged goods that normally sell for
P100,000 and that had an estimated net realizable value of 25,000 and undamaged goods that
normally sell for P60,000.

Inventory, January 1 660,000

Net Purchases, January 1 through September 30 4,240,000
Net Sales, January 1 through September 30 5,600,000

Total 2018 2017 2016

Net Sales 9,000,000 5,000,000 3,000,000 1,000,000
Cost of goods sold 6,750,000 3,840,000 2,200,000  710,000
Gross Income 2,250,000 1,160,000 800,000  290,000

What is the estimated amount of fire loss on September 30,2019? 

a. 700,000
b. 615,000
c. 630,000
d. 580,000

Solution:

Average gross profit rate (2,250,000/9,000,000) 25%

Cost Ratio (100% - 25%) 75%

Inventory – January 1 660,000

Net purchases 4,240,000
Goods available for sale 4,900,000
Cost of goods sold (5,600,000x75%) (4,200,000)
Inventory – September 30 700,000
Less: Undamaged goods (60,000x75%) 45,000
Realizable value of damaged goods 25,000 70,000

Fire loss 630,000

Problem 32-7 (AICPA Adapted)

 
At year-end, Empress Company had a fire which completely destroyed the goods in process
inventory. A physical inventory was taken after the fire.
The raw materials were valued at P600,000, the finished goods at P1,000,000 and factory
supplies at P100,000 at year-end.

The beginning inventories consisted of the following:

Finished goods 1,400,000

Goods in process 1,000,000
Raw Materials 300,000
Factory Supplies 400,000

Data for the current year

Sales 3,000,000
Purchases 1,000,000
Freight in 100,000
Direct labor 800,000
Manufacturing overhead – 50% of direct labor ?
Average gross profit on sales 30%

1. What is the cost of goods sold?

a. 2,100,000
b. 1,700,000
c. 1,900,000
d. 2,300,000

2. What is the cost of goods manufactured?

a. 2,500,000
b. 1,700,000
c. 3,100,000
d. 2,300,000

3. What is the estimated cost of the ending goods in process that were completely destroyed by
the fire?

a. 1,300,000
b. 2,100,000
c. 2,000,000
d. 1,700,000

Solutions
Question 1:

Cost of goods sold ( 70% x 3,000,000 ) 2,100,000

Question 2:

Finished goods - beginning 1,400,000

Cost of goods manufactured (SQUEEZE)   1,700,000
Goods available for sale 3,100,000
Finished goods – ending (1,000,000)

Cost of goods sold   2,100,000

The cost of goods manufactured is “squeezed” by simply working back from the cost of goods
sold.

Question 3:

Raw materials - beginning 300,000

Purchases 1,000,000
Freight in     100,000    1,100,000
Raw materials available for use 1,400,000
Raw materials – ending  ( 600,000 )
Raw materials used 800,000
Direct labor 800,000
Manufacturing overhead (50% x 800,000 )      400,000
Total manufacturing cost 2,000,000
Goods in process – beginning   1,000,000
3,000,000
Total goods in process
Goods in process – ending (SQUEEZE) (1,300,000)
Cost of goods manufactured   1,700,000

The amount of ending goods in process is “squeezed” by simply working back from the cost of goods
manufactured.
The factory supplies are no longer considered because these are already included in manufacturing
overhead.

Problem 32-8 (IAA)

 
Moderate Company provided the following information :

June July August

Sales on account 7,200,000 7,360,000 7,600,000
Cash sales 720,000 800,000 1,040,000

All merchandise is marked up to sell at invoice cost plus 20%. Inventory at the beginning of each
month is 30% of that month’s cost of goods sold.

1. What is the cost of goods sold?

a. 5,760,000
b. 6,000,000
c. 6,080,000
d. 6,600,000

2. What is the amount of purchases for July?

a. 6,528,000
b. 8,304,000
c. 6,800,000
d. 6,920,000

Solutions:
Question 1:

Cost of goods sold for June

(7,200,000+800,000 = 7,920,000/ 120%) 6,600,000

Question 2:

Cost of goods sold for July

(7,360,000+800,000 = 8,160,000/ 120%) 6,800,000
Cost of goods sold for August
(7,600,000+1,040,000 = 8,640,000/ 120%) 7,200,000

Inventory – July 1 (30% x 6,800,000) 2,040,000

Purchases for July ( SQUEEZED) 6,920,000
Goods Available for sale 8,960,000
Inventory – July 31 (30% x 7,200,000) (2,160,000)
Cost of goods sold for July 6,800,000

Sales ratio (100%+20%) 120%

Problem 32-9 (AICPA Adapted)

On April 30, a fire damaged the office of Amaze Company. The following balances were
gathered from the general ledger on March 31:
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 April bank statement and cancelled checks revealed checks written
during the period April 1 – 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 ₱ 440,000 which consisted of collections
from customers with the exception of ₱ 20,000 refund from a vendor for merchandise is
returned in April.

 Customers acknowledged indebtedness of ₱ 1,040,000 at April 30. Customers owed

another ₱ 60,000 that will never be recovered. Of the acknowledged indebtedness,
₱40,000 may prove uncollectible.

 Correspondence with suppliers revealed unrecorded obligations at April 30, of ₱ 340,000

for April merchandise shipment including ₱ 100,000 for shipment in transit on that date.

 The average gross profit rate is 40%.

 Inventory with a cost of ₱ 260,000 was salvaged and sold for ₱ 140,000. The balance of
the inventory was a total loss.

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

a. 4,200,000
b. 4,220,000
c. 4,140,000
d. 4,160,000

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

a. 1,760,000
b. 2,100,000
c. 2,020,000
d. 1,680,000
3. What is the inventory on April 30?

a. 1,476,000
b. 1,464,000
c. 1,440,000
d. 1,428,000

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

a. 1,440,000
b. 1,300,000
c. 1,340,000
d. 1,200,000

Solution

Question 1
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

Question 2
Accounts payable - April 30 for April shipments 340,000
Payment for April merchandise shipment 80,000
Purchases of April 420,000
Purchases up to March 31 1,680,000
Total purchases up to April 30 2,100,000

Cost Ratio (100% - 40%) 60%

Question 3
Inventory - January 1 1,880,000
Purchases 2,100,000
Purchase return (20,000)
Goods available for sale 3,960,000
Cost of good sold (4,200,000 - 60%) (2,520,000)
Inventory - April 30 1,440,000

Cost Ratio (100% - 40%) 60%

Question 4
Inventory - April 30 1,440,000
Goods in transit (100,000)
Salvage value of inventory (140,000)
Fire loss 1,200,000
Problem 32 – 10 (AICPA Adapted)

In conducting an audit of Remy Company for the year ended June 30, 2019, the entity’s CPA
observed that the physical inventory at an interim date, May 31, 2019.

Inventory, July 1, 2018 875,000

Physical Inventory, May 31, 2019 950,000
Sales for 11 months ended May 31, 2019 8,400,000
Sales for year ended June 30, 2019 9,600,000
Purchases for 11 months ended May 31, 2019 6,750,000
Purchases for year ended June 30, 2019 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 invemtory. Credit memos
had not been received nor had chargebacks to
vendors been recorded:
Total at May 31, 2019 10,000
Total at June 30, 2019 (including the May
unrecorded chargebacks) 15,000

c. Deposit made with vendor and charge to purchases

in April 2019. Product was shipped in July 2019. 20,000

d. Deposit made with vendor and charge to purchases

in May 2019. Product was shipped FOB Destination,
on May 29, 2019 and was included in May 31, 2019
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 the cost of 100,000

1. What is the cost of goods sold for the month of June 2019?

a. 980,000
b. 960,000
c. 880,000
 d. 780,000

2. What is the inventory on June 30, 2019?

a. 1,240,000
b. 1,140,000
c. 1,160,000
d. 1,340,000

Solution

Question 1
Physical Inventory Purchases up to Purchases up to
May 31, 2019 May 31,2019 June 30, 2019
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, 2018 875,000

Purchases up to May 31, 2019 6,740,000
Goods available for sale 7,615,000
Inventory - May 31, 2019 (895,000)
Cost of goods sold 6,720,000

Sales up to May 31, 2019 8,400,000

Cost of goods sold 6,720,000
Gross profit 1,680,000

Gross profit rate on sales (1,680,000/8,400,000) 20%

Cost ratio (100% - 20%) 80%

Sales for June 2019 (9,600,000 - 8,400,000) 980,000

Question 2
Inventory, July 1, 2018 875,000
Purchases for the year ended June 30, 2019 (as adjusted) 7,965,000
Goods available for sale 8,840,000
Cost of goods sold
Sales with profit (9,500,000 - 80%) 7,600,000
Sales without gross profit 100,000 (7,700,000)
Inventory, June 30, 2019 1,140,000