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Chapter 9: 14E (page 479)

Mark Price Company uses the gross profit method to estimate inventory for monthly reporting purposes. Presented below is information for the month of May. Inventory, May 1 $ 160,000 Purchases (gross) 640,000 Freight-in 30,000 Sales revenue 1,000,000 Sales returns 70,000 Purchase discounts 12,000 Instructions (a) Compute the estimated inventory at May 31, assuming that the gross profit is 30% of sales. (b) Compute the estimated inventory at May 31, assuming that the gross profit is 30% of cost.

Short Answer

Expert verified

(a) The estimated inventory on May 31 equals $167,000.

(b) The estimated inventory on May 31 equals $102,644.

Step by step solution

01

Calculation of net purchases

Net purchases is calculated as follows:

Netpurchases=Purchases+Freight-in-Purchasediscounts=$640,000+$30,000-$12,000=$658,000

02

Calculation of cost of goods sold in (a)

Cost of goods sold is calculated as follows:

Costofgoodssold=Salesrevenue-Salesreturn脳1-Grossprofitpercentage=$1,000,000-$70,000脳1-30%=$651,000

03

Calculation of estimated inventory at May 31

(a) Estimated inventory on May 31 is calculated as follows:

EstimatedinventoryatMay31=InventoryatMay1+Netpurchases-Costofgoodssold=$160,000+$658,000-$651,000=$167,000

04

Calculation of gross profit percentage on sales

Gross profit percentage on sales is calculated as follows:

Grossprofitpercentageonsales=Percentagemarkuponcost100%+Percentagemarkuponcost=30%100%+30%=23.08%

05

Calculation of cost of goods sold in (b)

Cost of goods sold is calculated as follows:

Costofgoodssold=Salesrevenue-Salesreturns脳1-Grossprofitpercentage=$1,000,000-$70,000脳1-23.08%=$715,356

06

Calculation of estimated inventory at May 31

(b) Estimated inventory at May 31 is calculated as follows:

EstimatedinventoryatMay31=InventoryatMay1+Netpurchases-Costofgoodssold=$160,000+$658,000-$715,356=$102,644

Thus, ending inventory on May 31, in part (a) equals $167,000, and in part (b) equals $102,644.

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Most popular questions from this chapter

Presented below is information related to Bobby Engram Company. Cost Retail Beginning inventory \( 58,000 \)100,000 Purchases (net) 122,000 200,000 Net markups 10,345 Net markdowns 26,135 Sales revenue 186,000 Instructions (a) Compute the ending inventory at retail. (b) Compute a cost-to-retail percentage (round to two decimals) under the following conditions. (1) Excluding both markups and markdowns. (2) Excluding markups but including markdowns. (3) Excluding markdowns but including markups. (4) Including both markdowns and markups. (c) Which of the methods in (b) above (1, 2, 3, or 4) does the following? (1) Provides the most conservative estimate of ending inventory. (2) Provides an approximation of lower-of-cost-or-market. (3) Is used in the conventional retail method. (d) Compute ending inventory at lower-of-cost-or-market (round to nearest dollar). (e) Compute cost of goods sold based on (d). (f) Compute gross margin based on (d).

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Accounting, Analysis, and Principles Englehart Company sells two types of pumps. One is large and is for commercial use. The other is smaller and is used in residential swimming pools. The following inventory data is available for the month of March. Units Price per Unit Total Residential Pumps Inventory at Feb. 28: 200 \( 400 \) 80,000 Purchases: March 10 500 \( 450 \)225,000 March 20 400 \( 475 \)190,000 March 30 300 \( 500 \)150,000 Sales: March 15 500 \( 540 \)270,000 March 25 400 \( 570 \)228,000 Inventory at March 31: 500 Commercial Pumps Inventory at Feb. 28: 600 \( 800 \)480,000 Purchases: March 3 600 \( 900 \)540,000 March 12 300 \( 950 \)285,000 March 21 500 \(1,000 \)500,000 Sales: March 18 900 \(1,080 \)972,000 March 29 600 \(1,140 \)684,000 Inventory at March 31: 500 In addition to the above information, due to a downturn in the economy that has hit Englehart鈥檚 commercial customers especially hard, Englehart expects commercial pump prices from March 31 onward to be considerably different (and lower) than at the beginning of and during March. Englehart has developed the following additional information. Commercial Pumps Residential Pumps Net realizable value (per unit) \(900 \)580 The normal profit margin is 16.67% of cost. Englehart uses the FIFO accounting method. Accounting (a) Determine the dollar amount that Englehart should report on its March 31 balance sheet for inventory. Assume Englehart applies lower-of-cost-or-net realizable value at the individual product level. (b) Repeat part (a) but assume Englehart applies lower-of-cost-or-net realizable value at the major categories level. Englehart places both commercial and residential pumps into the same (and only) category. Analysis Which of the two approaches above (individual product level or major categories) for applying LCNRV do you think gives the financial statement reader better information? Principles Assume that during April, the net realizable value of commercial pumps rebounds to $1,050. (a) Briefly describe how Englehart will report in its April financial statements the inventory remaining from March 31. (b) Briefly describe the conceptual trade-offs inherent in the accounting in part (a).

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