As a result of taking a physical inventory count on December 31, 2004, the Chuck

Question

As a result of taking a physical inventory count on December 31, 2004, the Chuckles Company inventory was determined to be $61,500. The auditors for Chuckles suspected an inventory shortage and used the gross profit method to estimate the ending inventory. The accounting records for the company contained the following information:

Inventory (1/1/04)

$ 130,000

Purchases (2004)

760,000

Sales (2004)

1,020,000

Sales Returns (2004)

60,000

Gross Profit Ratio

25% of sales

Using the gross profit method, what did the auditors estimate as the amount of the inventory shortage at December 31, 2004?

a.

$240,000

b.

$100,000

c.

$108,500

d.

$170,000

Please explain the answer. Thank you.

Inventory (1/1/04)

$ 130,000

Purchases (2004)

760,000

Sales (2004)

1,020,000

Sales Returns (2004)

60,000

Gross Profit Ratio

25% of sales

Explanation / Answer

Hence shortage=(170,000-61500)

=$108500(C)

To beginning inventory 130,000 By net sales(1020000-60,000) 960,000 To purchases 760,000 By ending inventory(balance) $170,000 To gross profit(25%*960,000) 240,000 Total $1130000 Total $1130000

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