Problem 5-22A Estimating ending inventory: gross margin method
The inventory of Don’s Grocery was destroyed by a tornado on October 6 of the current year. Fortunately, some of the accounting records were at the home of one of the owners and were not damaged. The following information was available for the period of January 1 through October 6:
- Beginning inventory, January 1: $140,000
- Purchases through October 6: $670,000
- Sales through October 6: $1,100,000
Gross margin for Don’s has traditionally been 30 percent of sales.
Required
a. For the period ending October 6, compute the following:
(1) Estimated gross margin.
(2) Estimated cost of goods sold.
(3) Estimated inventory at October 6.
b. Assume that $15,000 of the inventory was not damaged. What is the amount of the loss from the tornado?
c. If Don’s had used the perpetual inventory system, how would it have determined the amount of the inventory loss?
Problem 5-23A Estimating ending inventory: gross margin method
Toyland wishes to produce quarterly financial statements, but it takes a physical count of inventory only at year-end. The following historical data were taken from the Year 1 and Year 2 accounting records:
| Year 1 | Year 2 | |
|---|---|---|
| Net sales | $150,000 | $190,000 |
| Cost of goods sold | $76,000 | $89,200 |
At the end of the first quarter of Year 3, Toyland’s ledger had the following account balances:
| Sales | $210,000 |
| Purchases | $90,000 |
| Beginning Inventory (1/1/Year 3) | $32,100 |
| Ending Inventory (3/31/Year 3) | $16,000 |
Based on purchases and sales, the Toyland accountant thinks inventory is low.
Required
Using the information provided, estimate the following for the first quarter of Year 3:
a. Cost of goods sold. (Use the average cost of goods sold percentage.)
b. Ending inventory at March 31.
c. What could explain the difference between actual and estimated inventory?
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