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 $60,100. The following information for the month of November was available from company records:

Purchases	$	126,000
Freight-in		4,600
Sales		260,000
Sales returns		7,500
Purchases returns		6,500

In addition, the controller is aware of $7,500 of inventory that was stolen during November from one of the company’s warehouses.
1.Calculate the estimated inventory at the end of November, assuming a gross profit ratio of 40%.
Beginning inventory
Plus: Net purchases
Freight-in
Cost of goods available for sale
Less: Cost of goods sold:
Net sales
Less: Estimated gross profit
Estimated cost of goods sold
Estimated cost of inventory before theft
Less: Stolen inventory
Estimated ending inventory

2.			Calculate the estimated inventory at the end of November, assuming a markup on cost of 100%
		Beginning inventory
		Plus: Net purchases
		Freight-in
		Cost of goods available for sale
		Less: Cost of goods sold:
		Net sales
		Less: Estimated gross profit
		Estimated cost of goods sold
		Estimated cost of inventory before theft
		Less: Stolen inventory
		Estimated ending inventory

Answer 1

1.

	$	$
Beginning inventory		60,100
Plus: Net purchases [ purchases - purchases returns = $126,000 - $6,500 ]		119,500
Freight-in		4,600
Cost of goods available for sale		184,200
Less: Cost of goods sold:
Net sales [ sales - sales returns = $260,000 - $7,500 ]	252,500
Less: Estimated gross profit [ 40% * net sales = 40% * $252,500 ]	( 101,000 )
Estimated cost of goods sold	151,500	( 151,500 )
Estimated cost of inventory before theft		32,700
Less: Stolen inventory		( 7,500 )
Estimated ending inventory		25,200

2.

	$	$
Beginning inventory		60,100
Plus: Net purchases [ purchases - purchases returns = $126,000 - $6,500 ]		119,500
Freight-in		4,600
Cost of goods available for sale		184,200
Less: Cost of goods sold:
Net sales [ sales - sales returns = $260,000 - $7,500 ]	252,500
Less: Estimated gross profit [ 50% * $252,500 ] ( refer working note 1 )	( 126,250 )
Estimated cost of goods sold	126,250	( 126,250 )
Estimated cost of inventory before theft		57,950
Less: Stolen inventory		( 7,500 )
Estimated ending inventory		50,450

Working note :

1) Markup on cost is 100%

Let us assume the cost to be $100. Profit is 100% on cost. So, the profit amount will be $100.

Selling price = cost + profit = $100 + $100 = $200

Now let us calculate % of profit on selling price

% of profit on selling price = [ profit / selling price ] * 100 = [ $100 / $200 ] * 100 = 50%

So, here the estimated gross profit = 50% * net sales = 50% * $252,500 = $126,250

2) Ending inventory on October will be the opening inventory of November.