PR 7-5B Retail method; gross profit method

Selected data on merchandise inventory, purchases, and sales for Segal Co. and Iroquois
Co. are as follows:
Cost Retail
Segal Co.
Merchandise inventory, March 1 $ 298,000 $ 375,000
Transactions during March:
Purchases (net) 4,850,000 6,225,000
Sales 6,320,000
Sales returns and allowances 245,000
Iroquois Co.
Merchandise inventory, January 1 $ 300,000
Transactions during January thru March:
Purchases (net) 4,150,000
Sales 6,900,000
Sales returns and allowances 175,000
Estimated gross profi t rate 40%
Instructions
1. Determine the estimated cost of the merchandise inventory of Segal Co. on March 31
by the retail method, presenting details of the computations.
2. 
a. Estimate the cost of the merchandise inventory of Iroquois Co. on March 31 by the
gross profit method, presenting details of the computations.
 b. Assume that Iroquois Co. took a physical inventory on March 31 and discovered
that $396,500 of merchandise was on hand. What was the estimated loss of inventory
due to theft or damage during January thru March?

Answer:
1.   
 A B C 1 SEGAL CO. 2  Cost Retail 3 Merchandise inventory, March 1  $ 298,000  $ 375,000 4 Net purchases    4,850,000   6,225,000 5 Merchandise available for sale  $5,148,000  $6,600,000 6 Ratio of cost to retail price: 78% $6,600,000 $5,148,000 =   7 Sales   $6,320,000  8 Less sales returns and allowances   245,000  9 Net sales    6,075,000 10 Merchandise inventory, March 31, at retail   $ 525,000 
11 
Merchandise inventory, at estimated cost  ($525,000 × 78%)  
 $ 409,500   
2.  
 A B C 1 IROQUOIS CO. 2 a.  Cost 3 Merchandise inventory, January 1   $ 300,000 4 Net purchases      4,150,000 5 Merchandise available for sale   $4,450,000 6 Sales   $6,900,000  7 Less sales returns and allowances   175,000  8 Net sales  $6,725,000  9 Less estimated gross profit ($6,725,000 × 40%)   2,690,000  10 Estimated cost of merchandise sold    4,035,000 11 Estimated merchandise inventory, March 31   $ 415,000 12    13 b.   14 Estimated merchandise inventory, March 31   $ 415,000 15 Physical inventory count, March 31    396,500 
16 
Estimated loss due to theft or damage,   January 1–March 31  
 $ 18,500 

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