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 $59,400. The following information for the month of November was available from company records:

Purchases	$	119,000
Freight-in		3,900
Sales		225,000
Sales returns		9,500
Purchases returns		8,500

In addition, the controller is aware of $12,500 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 100%.

1.

Beginning inventory Plus: Net purchases Freight-in Cost of goods available for sale 0 Less: Cost of goods sold: Net sales Less: Estimated gross profit Estimated cost of goods sold 0 Estimated cost of inventory before theft 0 Less: Stolen inventory Estimated ending inventory $0

2.

Beginning inventory Plus: Net purchases Freight-in Cost of goods available for sale 0 Less: Cost of goods sold: Net sales Less: Estimated gross profit Estimated cost of goods sold 0 Estimated cost of inventory before theft 0 Less: Stolen inventory Estimated ending inventory $0

Answer 1

1	Estimated Cost of ending Inventory	=	$      32,000
2	Estimated Cost of ending Inventory	=	$      53,550
	Workings:
1	Cost of beginning Inventory		$      59,400
Add:	Net Purchase		$   1,10,500
Add:	Freight on purchase		$         3,900
	Cost of goods available for sale		$   1,73,800
	Cost of goods sold:
	Net Sales	$         2,15,500
Less:	Gross Profit (@40%)	$           -86,200
	Cost of goods sold		$   1,29,300
	Estimated cost of Inventory before theft		$      44,500
Less:	Inventory stolen		$      12,500
	Estimated Cost of ending Inventory		$      32,000
2	Cost of beginning Inventory		$      59,400
Add:	Net Purchase		$   1,10,500
Add:	Freight on purchase		$         3,900
	Cost of goods available for sale		$   1,73,800
Less:	Cost of goods sold:
	Net Sales	$         2,15,500
Less:	Estimated Gross Profit [($215500/2)*1]	$       -1,07,750
	Estimated Cost of goods sold		$   1,07,750
	Estimated cost of Inventory before theft		$      66,050
Less:	Inventory stolen		$      12,500
	Estimated Cost of ending Inventory		$      53,550

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