Appendix PR 7-7A Retail method; gross profit method

Selected data on merchandise inventory, purchases, and sales for Celebrity Tan Co. and Ranchworks Co. are as follows:

Cost Retail Celebrity Tan Merchandise inventory, August 1 $  300,000 $  575,000 Transactions during August: Purchases (net)2,149,000 3,375,000 Sales 3,170,000 Ranchworks Co. Merchandise inventory, March 1 $  880,000 Transactions during March through November: Purchases (net)9,500,000 Sales15,800,000 Estimated gross profit rate38%










Instructions
1. Determine the estimated cost of the merchandise inventory of Celebrity Tan Co. on August 31 by the retail method, presenting details of the computations.
2. a. Estimate the cost of the merchandise inventory of Ranchworks Co. on November 30 by the gross profit method, presenting details of the computations.
 b. Assume that Ranchworks Co. took a physical inventory on November 30 and discovered that $369,750 of merchandise was on hand. What was the estimated loss of inventory due to theft or damage during March through November?


Answer:
1.
Cost Retail
Merchandise inventory, August 1 $ 300,000 $ 575,000
Net purchases2,149,000 3,375,000
Merchandise available for sale $2,449,000 $3,950,000
$2,449,000
$3,950,000
Sales3,170,000
Merchandise inventory, August 31, at retail$ 780,000
Merchandise inventory, at estimated cost
($780,000 × 62%)$ 483,600
2.
Cost
 a. Merchandise inventory, March 1$ 880,000
Net purchases9,500,000
Merchandise available for sale$10,380,000
Sales$15,800,000
Less estimated gross profit ($15,800,000 × 38%) 6,004,000
Estimated cost of merchandise sold9,796,000
Estimated merchandise inventory, November 30 $ 584,000
 b. Estimated merchandise inventory, November 30 $ 584,000
Physical inventory count, November 30369,750
Estimated loss due to theft or damage, 
March 1–November 30$ 214,250