Problem 5-22B: Estimating Ending Inventory: Gross Margin Method

A hurricane destroyed the inventory of Coleman Feed Store on September 21 of the current year. Although some of the accounting information was destroyed, the following information was discovered for the period of January 1 through September 21:

Beginning inventory, January 1: $120,000
Purchases through September 21: $450,000
Sales through September 21: $800,000

The gross margin for Coleman Feed Store has traditionally been 35 percent of sales.

Required
a. For the period ending September 21, compute the following:
(1) Estimated gross margin.
(2) Estimated cost of goods sold.
(3) Estimated inventory at September 21.

b. Assume that $8,000 of the inventory was not damaged. What is the amount of the loss from the hurricane?

c. Coleman Feed Store uses the perpetual inventory system. If some of the accounting records had not been destroyed, how would Coleman determine the amount of the inventory loss?

Problem 5-23B: Estimating Ending Inventory: Gross Margin Method

Sam Todd, owner of Todd Company, is reviewing the quarterly financial statements and thinks the cost of goods sold is out of line with past years. The following historical data are available for Year 1 and Year 2:

	Year 1	Year 2
Net sales	$220,000	$250,000
Cost of goods sold	$99,000	$117,200

At the end of the first quarter of Year 3, Todd Company’s ledger had the following account balances:

Sales: $280,000
Purchases: $210,000
Beginning inventory, January 1, Year 3: $70,000

Required
Using the information provided, estimate the following for the first quarter of Year 3:
a. Cost of goods sold. (Use average cost of goods sold percentage.)
b. Ending inventory at March 31 based on the historical cost of goods sold percentage.
c. Inventory shortage if the inventory balance as of March 31 is $125,000.

Problem 5-24B: Effect of Inventory Errors on Financial Statements

The following income statement was prepared for Rice Company for Year 1:

RICE COMPANY
Income Statement
For the Year Ended December 31, Year 1

Sales: $75,000
Cost of goods sold: ($41,250)
Gross margin: $33,750
Operating expenses: ($10,120)
Net income: $23,630

During the year-end audit, the following errors were discovered:

An $1,800 payment for repairs was erroneously charged to the Cost of Goods Sold account. (Assume that the perpetual inventory system is used.)
Sales to customers for $3,400 at December 31, Year 1, were not recorded in the books for Year 1. Also, the $1,870 cost of goods sold was not recorded.
A mathematical error was made in determining ending inventory. Ending inventory was understated by $1,700. (The Inventory account was written down in error to the Cost of Goods Sold account.)

Required
Determine the effect, if any, of each of the errors on the following items. Give the dollar amount of the effect and whether it would overstate (O), understate (U), or not affect (NA) the account. The effect on sales is recorded as an example.

Error No. 1	Amount of Error	Effect
Sales, Year 1	NA	NA
Ending inventory, December 31, Year 1
Gross margin, Year 1
Beginning inventory, January 1, Year 2
Cost of goods sold, Year 1
Net income, Year 1
Retained earnings, December 31, Year 1
Total assets, December 31, Year 1

Error No. 2	Amount of Error	Effect
Sales, Year 1	$3,400	U
Ending inventory, December 31, Year 1
Gross margin, Year 1
Beginning inventory, January 1, Year 2
Cost of goods sold, Year 1
Net income, Year 1
Retained earnings, December 31, Year 1
Total assets, December 31, Year 1

Error No. 3	Amount of Error	Effect
Sales, Year 1	NA	NA
Ending inventory, December 31, Year 1
Gross margin, Year 1
Beginning inventory, January 1, Year 2
Cost of goods sold, Year 1
Net income, Year 1
Retained earnings, December 31, Year 1
Total assets, December 31, Year 1

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Problem 5-22B: Estimating Ending Inventory: Gross Margin Method