As a result of taking a physical inventory count on December 31, 2004, the Chuck
ID: 2559851 • Letter: A
Question
As a result of taking a physical inventory count on December 31, 2004, the Chuckles Company inventory was determined to be $82,500. The auditors for Chuckles suspected an inventory shortage and used the gross profit method to estimate the ending inventory. The accounting records for the company contained the following information:
Inventory (1/1/04)
$ 130,000
Purchases (2004)
760,000
Sales (2004)
1,020,000
Sales Returns (2004)
60,000
Gross Profit Ratio
30% of sales
Using the gross profit method, what did the auditors estimate as the amount of the inventory shortage at December 31, 2004?
a.
$240,000
b.
$100,000
c.
$135,500
d.
$170,000
Inventory (1/1/04)
$ 130,000
Purchases (2004)
760,000
Sales (2004)
1,020,000
Sales Returns (2004)
60,000
Gross Profit Ratio
30% of sales
Explanation / Answer
Net Sales
= Sales – Sales returns
= $ 1,020,000 - $ 60,000
= $ 960,000
Gross profit
= 30% of Sales
= 30% of $ 960,000
= $ 288,000
So, Cost of goods sold
= Net Sales – Gross Profit
= $ 960,000 - $ 288,000
= $ 672,000
So, Closing inventory as per gross profit method
= Opening Inventory + Purchases – Cost of goods sold
= $130,000 + $760,000 - $ 672,000
= $218,000
So, estimated shortage of inventory
= Valuation as per auditors – Value as given by the company
= $218,000 - $82,500
= $135,500
So, option c is the correct option
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