Question

Gross profit method of estimating inventory.

1. Leia completed a physical inventory on 12-31-18. On the basis of her count, Leia determined her ending inventory to be $416,750. In recent years, Leia's gross profit equaled 64% of Leia’s selling price.

Additional information from Leia’s accounting records identified the following:

Inventory, 12-31-17                                                                                                             $320,000

Purchases during 2018                                                                                                     $1,208,000

Purchase returns during 2018                                                                                               $44,000

Purchase discounts during 2018                                                                                            $9,664

Sales during 2018                                                                                                              $3,066,000

Sales returns during 2018                                                                                                   $160,000

Leia suspects some inventory is missing. Leia used the gross profit method to estimate what her ending inventory should be based on historical facts and trends. Prepare the entry, if necessary, to reflect Leia’s estimated loss from any missing inventory.

2. Evan completed a physical inventory on 12-31-18. On the basis of his count, Evan determined his ending inventory at retail selling prices was $306,000. In recent years, Evan's gross profit equaled 80% of Evan’s inventory costs.

Additional information from Evan Additional information from Leia’s accounting records identified the following:

Inventory cost, 12-31-17                                                                                                     $230,000

Net purchases during 2018                                                                                              $1,008,000

Net sales revenue during 2018                                                                                       $1,863,000

Evan suspects some inventory is missing. Evan used the gross profit method to estimate what his ending inventory should be based on historical facts and trends. Prepare the entry, if necessary, to reflect Evan’s estimated loss from any missing inventory.

Answer 1

Answer :

(a).

Sales	$3,066,000	-
Less : Sales returns	$160,000	-
Net sales	$2,906,000	a
Gross profit %	64%	-
Gross profit on sales	$1,859,840	b
Cost of goods sold	$1,046,160	a-b

Inventory 12.31.17	-	$320,000
Purchases	$1,208,000	-
Purchases returns	-$44,000	-
Purchase discount	$-9,664	-
Net purchase during 2018	-	$1,154,336
Cost of goods available for sale	-	$1,474,336
Cost of goods sold	-	$1,046,160
Closing inventory	-	$428,176
Actual ending inventory	-	$416,750
Estimated loss	-	$11,426

Journal Entries

Date	Account Title and explanations	Debit	Credit
	Cost of goods sold	$11,426	-
	Inventory	-	$11,426
	(To Record loss of inventory)	-	-

Note : If loss on inventory is accounted separately entry will be debited to loss on inventory.

(b).

Net sales	$1,863,000	a
Gross profit % on sales	44.44%	-
Gross profit on sales	$$828,000	b
Cost of goods sold	$1,035,000	a-b

80% profit on inventory cost is equal 44.44% profit on sales = 80%/180%

Ending inventory at retail SP	$306,000	-
Gross profit % on sales	44.44%	-
Gross profit on sales	$136,000	50% of $306,000
Ending inventory at cost	$170,000	-

Invnetory 13-31-17	$230,000
Net purchase during 2018	$1,008,000
Cost of goods available for sale	$1,238,000
Cost of goods sold	$1,035,000
Closing inventory	$203,000
Actual ending inventory at cost	$170,000
Estimated loss	$33,000

Journal Entries

Date	Account Titles and Explanations	Debit	Credit
	Cost of goods sold	$33,000	-
	Inventory	-	$33,000
	(To Record loss of invnetory)	-	-

Note : If loss on inventory is accounted separately entry will be debited to loss on inventory.