Exercise 9-16 Gheorghe Moresan Lumber Company handles three principal lines of m

Question

Exercise 9-16 Gheorghe Moresan Lumber Company handles three principal lines of merchandise with these varying rates of gross profit on cost. Lumber 25% Millwork 30% Hardware and fittings 40% On August 18, a fire destroyed the office, lumber shed, and a considerable portion of the lumber stacked in the yard. To file a report of loss for insurance purposes, the company must know what the inventories were immediately preceding the fire. No detail or perpetual inventory records of any kind were maintained. The only pertinent information you are able to obtain are the following facts from the general ledger, which was kept in a fireproof vault and thus escaped destruction. Lumber Millwork Hardware Inventory, Jan. 1, 2014 $273,200 $93,960 $46,000 Purchases to Aug. 18, 2014 1,513,900 384,000 161,600 Sales to Aug. 18, 2014 2,057,100 557,440 265,720 Submit your estimate of the inventory amounts immediately preceding the fire. Lumber Millwork Hardware Inventory $ $ $

Explanation / Answer

Answer:

Calculation of Cost of Goods Sold

Lumber

Millwork

Hardware

Sales to Aug 18, 2014

$2,057,100

$557,440

$265,720

% Gross Profit on Cost

25%

30%

40%

Gross Profit on Cost in dollars

$411,420

($2,057,100 x 25/125)

$128,640

($557,440 x 30/130)

$75,920

($265,720 x 40/140)

Cost of Goods Sold (Sales - Gross Profit)

$1,645,680

$428,800

$189,800

Gross Profit on Cost is calculated as follows:

Rate of Gross profit on cost is given. For Lumber it is 25% on Cost of Goods Sold. It means Sales = COGS + Gross Profit. If COGS is 100% then Gross Profit on Cost is 25%, therefore Sales is 100+25 = 125%

So the Gross Profit on Sales = Sales / 125% x 25 i.e. $2,057,100 / 125 x 25 = $411,420

Similarly Millwork and hardware gross profit is calculated.

Calculation of Ending Inventory amount in dollars

Cost of Goods Sold = beginning Inventory + purchases – Ending Inventory

Ending Inventory = Beginning Inventory + Purchases – Cost of Goods Sold

Lumber

Millwork

Hardware

Inventory on Jan 1, 2014

$273,200

$93,960

$46,000

Purchases to Aug, 2014

$1,513,900

$384,000

$161,600

Less: Cost of Goods Sold

($1,645,680)

($428,800)

($189,800)

Ending Inventory

$141,420

$49,160

$17,800

Lumber

Millwork

Hardware

Sales to Aug 18, 2014

$2,057,100

$557,440

$265,720

% Gross Profit on Cost

25%

30%

40%

Gross Profit on Cost in dollars

$411,420

($2,057,100 x 25/125)

$128,640

($557,440 x 30/130)

$75,920

($265,720 x 40/140)

Cost of Goods Sold (Sales - Gross Profit)

$1,645,680

$428,800

$189,800

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