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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

Fuque Inc. uses the retail inventory method to estimate ending inventory for its monthly financial statements. The following data pertain to a single department for the month of October 2018. Inventory, October 1, 2018 At cost \( 52,000 At retail 78,000 Purchases (exclusive of freight and returns) At cost 272,000 At retail 423,000 Freight-in 16,600 Purchase returns At cost 5,600 At retail 8,000 Markups 9,000 Markup cancellations 2,000 Markdowns (net) 3,600 Normal spoilage and breakage 10,000 Sales revenue 390,000 Instructions (a) Using the conventional retail method, prepare a schedule computing estimated lower-of-cost-or-market inventory for October 31, 2018. (b) A department store using the conventional retail inventory method estimates the cost of its ending inventory as \)60,000. An accurate physical count reveals only $47,000 of inventory at lower-of-cost-or-market. List the factors that may have caused the difference between the computed inventory and the physical count.

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