Question

On January 1, 2020, the merchandise inventory of Ivanhoe, Inc. was $1700000. During 2020 Ivanhoe purchased $3398000 of merchandise and recorded sales of $4200000. The gross profit rate on these sales was 20%. What is the merchandise inventory of Ivanhoe at December 31,

2020? $1738000. $3360000. $840000. $802000.

Answer 1

We have an equation that,

Gross profit = Sales - Cost of goods sold.

Sales = $ 4,200,000. (given).

Gross profit = 20 % of sales.

Gross profit = 20 % of $4,200,000.

Gross profit = $ 840,000.

So,

Gross profit = Sales - Cost of goods sold.

840,000 = 4,200,000 - Cost of goods sold.

Cost of goods sold = 4,200,000 - 840,000.

Cost of goods sold = $ 3,360,000.

We need to find out the value of ending inventory.

Cost of goods sold = Opening inventory + Purchases - ending inventory.

Opening inventory = $ 1,700,000 (given).

Purchases = $ 3,398,000.

Cost of goods sold = $ 3,360,000.

So,

3,360,000 = 1,700,000 + 3,398,000 - ending inventory.

3,360,000 = 5,098,000 - ending inventory.

Ending inventory = $ 1,738,000.

Hence, Option A is the correct answer.

SUMMARY:

By solving equation,

Cost of goods sold = Opening inventory +purchases -ending inventory.

We get value of ending inventory as $ 1,738,000.

Hence option A is the correct answer.