EX 7-22 Gross profit inventory method

The merchandise inventory was destroyed by fire on December 13. The following data
were obtained from the accounting records:

Jan. 1                   Merchandise inventory             $ 500,000
Jan. 1–Dec. 13     Purchases (net)                         4,280,000
                             Sales (net)                                6,500,000
                             Estimated gross profit rate       36%

a. Estimate the cost of the merchandise destroyed.
b. Briefly describe the situations in which the gross profit method is useful.

Answer:
a.
 A B C 1   Cost 2 Merchandise inventory, January 1  $   500,000 3 Purchases (net), January 1–December 11    4,280,000 4 Merchandise available for sale  $4,780,000 5 Sales (net), January 1–December 11 $6,500,000  6 Less estimated gross profit ($6,500,000 × 36%)  2,340,000  7 Estimated cost of merchandise sold    4,160,000 8 Estimated merchandise inventory, December 11  $   620,000 

b. The gross profit method is useful for estimating inventories for monthly or quarterly financial statements. It is also useful in estimating the cost of merchandise destroyed by fire or other disasters.

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