PR 7-5A Retail method; gross profit method

Selected data on merchandise inventory, purchases, and sales for Myrina Co. and Lemnos
Co. are as follows:
                                                                     Cost                 Retail
Myrina Co.
Merchandise inventory, May 1                $ 130,000        $ 185,000
Transactions during May:
Purchases (net)                                        1,382,000         1,975,000
Sales                                                                                 1,950,000
Sales returns and allowances                                                40,000
Lemnos Co.
Merchandise inventory, July 1                $ 280,000
Transactions during July through September:
Purchases (net)                                        3,400,000
Sales                                                        5,300,000
Sales returns and allowances                     100,000
Estimated gross profit rate                             35%

Instructions
1. Determine the estimated cost of the merchandise inventory of Myrina Co. on May 31
by the retail method, presenting details of the computations.
2.
a. Estimate the cost of the merchandise inventory of Lemnos Co. on September 30 by
the gross profit method, presenting details of the computations.
b. Assume that Lemnos Co. took a physical inventory on September 30 and discovered
that $269,750 of merchandise was on hand. What was the estimated loss of inventory
due to theft or damage during July through September?

Answer:
1.   
 A B C 1 MYRINA CO. 2  Cost Retail 3 Merchandise inventory, May 1  $ 130,000  $ 185,000 4 Net purchases    1,382,000   1,975,000 5 Merchandise available for sale  $1,512,000  $2,160,000 6 Ratio of cost to retail price: 70% $2,160,000   $1,512,000  =   7 Sales   $1,950,000  8 Less sales returns and allowances   40,000  9 Net sales    1,910,000 10 Merchandise inventory, May 31, at retail   $ 250,000 
11 
Merchandise inventory, at estimated cost  ($250,000 × 70%)  
 $ 175,000   
2.  
 A B C 1 LEMNOS CO. 2 a.  Cost 3 Merchandise inventory, July 1   $ 280,000 4 Net purchases     3,400,000 5 Merchandise available for sale   $3,680,000 6 Sales   $5,300,000  7 Less sales returns and allowances   100,000  8 Net sales  $5,200,000  9 Less estimated gross profit ($5,200,000 × 35%)   1,820,000  10 Estimated cost of merchandise sold    3,380,000 11 Estimated merchandise inventory, September 30   $ 300,000 12    13 b.   14 Estimated merchandise inventory, September 30   $ 300,000 15 Physical inventory count, September 30    269,750 
16 
Estimated loss due to theft or damage,   July 1–September 30  
 $ 30,250 

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