The Bubba Company uses the gross profit method to estimate inventory and cost of

Question

The Bubba Company uses the gross profit method to estimate inventory and cost of goods sold for interim reporting purposes. The average gross profit rate is 25 percent of sales. The following data relate to the month of May:

Inventory cost, May 1

$30,000

Purchases during the month at cost

80,400

Sales

100,800

Sales returns

3,600

Using the data above, what is the estimated ending inventory at May 31?

$24,300

$25,200

$34,800

$37,500

Inventory cost, May 1

$30,000

Purchases during the month at cost

80,400

Sales

100,800

Sales returns

3,600

Explanation / Answer

Gross profit= Net Sales x GP%

                   =(100,800-3,600) x 25%

                    =97,200 x 25%

                    =24,300

Cost of Goods sold=97,200-24,300=72,900

Ending inventory

= Beg inventory+ purchases- Cost of goods sold

= 30,000+80,400-72,900

=$37,500

Option 4 correct

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