Question

Gross Profit Method

Royal Gorge Company uses the gross profit method to estimate ending inventory and cost of goods sold when preparing monthly financial statements required by its bank. Inventory on hand at the end of October was $58500. The following information for the month of November was available from company records:

Purchases of $110,000

Freight-in of $3,000

Sales of $180,000

Sales Returns of $5,000

Purchase Returns of $4,000

In addition, the controller is aware of $8,000 of inventory that was stolen during November from one of the company's warehouses.

Required:

2. Using the template below, calculate the estimated inventory at the end of November, assuming a markup on cost of 60%.

Beginning Inventory		58500
Plus: Net purchases		??
Freight-in		3000
Cost of Goods Available for Sale		??
Less: Cost of Goods Sold
Net Sales	??
Less Estimated Gross Profit	??
Estimated Cost of Goods Sold		??
Estimated Inventory before Theft		??
Less: Stolen Inventory		(8000)
Estimated Ending Inventory		??

Answer 1

Ans. 2	Particulars	Amount	Amount
	Beginning inventory (at cost)		$58,500
	Plus : Net purchase		$106,000
	Frieght - in		$3,000
	Cost of goods available for sale		$167,500
	Less: Cost of goods sold
	Net sales (at selling price)	$175,000
	Less: Estimated gross profit	-$65,625
	Estimated cost of goods sold		$109,375
	Estimated cost of inventory before theft		$58,125
	Less: Stolen inventory		-$8,000
	Estimated ending inventory		$50,125
	*Working Notes:
	*Ending inventory for October = Beginning inventory for November = $58,500
	Net purchase =   Purchases - Purchase returns
	$110,000 - $4,000 = $106,000
	Net sales =   Sales - Sales returns
	$180,000 - $5,000 =   $175,000
	Markup on 60% of cost   =   60% / (100% + 60%) * 100 =   37.50% of sales
	Estimated gross profit = Net sales * 37.50%
	$175,000 * 37.50%
	$65,625
	*Estimated cost of inventory before theft   = Cost of goods available for sale - Estimated cost of goods sold