E9-12 (Gross Profit Method) Astaire Company uses the gross profit method to esti
ID: 2343280 • Letter: E
Question
E9-12 (Gross Profit Method) Astaire Company uses the gross profit method to estimate inventory for monthly reporting purposes. Presented below is information for the month of May. Inventory, May1 Purchases (gross) Freight-in Sales Sales returns Purchase discounts $ 160,000 640,000 30,000 1,000,000 70,000 12,000 Instructions (a) Compute the estimated inventory at May 31, assuming that the gross profit is 25% of sales (b) Compute the estimated inventory at May 31, assuming that the gross profit is 25% of costExplanation / Answer
Question E9-12:
Answer to Part a.
Gross Profit = 25% of Sales
Net Sales = $1,000,000 - $70,000
Net Sales = $930,000
Gross Profit = $930,000 * 25%
Gross Profit = $232,500
Gross Profit = Sales - Cost of Goods Sold
$232,500 = $930,000 - Cost of Goods Sold
Cost of Goods Sold = $697,500
Net Purchases = $640,000 - $12,000 = $628,000
Cost of Goods Sold = Beginning Inventory + Net Purchases + Freight In – Ending Inventory
$697,500 = $160,000 + $628,000 + $30,000 - Ending Inventory
Ending Inventory = $120,500
Answer to Part b.
Gross Profit = 25% * Cost of Goods Sold
Net Sales - Cost of Goods Sold = 25% * Cost of Goods Sold
$930,000 = 125% * Cost of Goods Sold
Cost of Goods Sold = $744,000
Net Purchases = $640,000 - $12,000 = $628,000
Cost of Goods Sold = Beginning Inventory + Net Purchases + Freight In – Ending Inventory
$744,000 = $160,000 + $628,000 + $30,000 - Ending Inventory
Ending Inventory = $74,000
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