Question

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 $60,300. The following information for the month of November was available from company records: Purchases Freight-in Sales Sales returns Purchases returns $128,000 4,800 270,000 23,000 7,500 In addition, the controller is aware of $8,500 of inventory that was stolen during November from one of the company's warehouses. Required: : 1. Calculate the estimated inventory at the end of November, assuming a gross profit ratio of 40%. 2. Calculate the estimated inventory at the end of November, assuming a markup on cost of 60%.

Answer 1

Beginning inventory = $60,300

Purchases = $128,000

Freight in = $4,800

sales = $270,000

Sales return = $23,000

Purchase return = $7,500

Inventory stolen = $8,500

Net sales = sales - Sales return

= 270,000-23,000

= $247,000

Cost of goods available for sale = Beginning inventory + Purchases - Purchase return + Freight in - Inventory stolen

= 60,300+128,000-7,500+4,800-8,500

= $177,100

1. Gross profit ratio = 40%

Gross profit = Net sales x 40%

= 247,000 x 40%

= $98,800

Cost of goods sold = Net sales - Gross profit

= 247,000-98,800

= $148,200

Estimated ending inventory = Cost of goods available for sale - Cost of goods sold

= 177,100 - 148,200

= $28,900

2. Mark up =60%

Let the cost of goods sold be $K

Mark up = K x 60%

= 0.6K

Net sales = Cost of goods sold x Mark up

247,000 = K+0.6K

1.6K = 247,000

K = 247,000/1.6

= $154,375

Hence, cost of goods sold = $154,375

Estimated Ending inventory = Cost of goods available for sale - Cost of goods sold

= 177,100-154,375

= $22,725

Kindly comment if you need further assistance. Thanks‼!