Share
Explore BrainMass

How do you calculate the estimated cost of inventory burned and ending inventory?

1) Estimate cost of inventory burned

2) Computer ending inventory using the retail method which approximates lowr of cost or market.

------------

Note: Each part of the case is independent of each other.

Part A-
On December 31, 2010 Felt Company's inventory burned. Sales and purchases for the year had been \$1,400,000 and \$980,000, respectively. The beginning inventory (Jan. 1, 2010) was \$170,000; in the past Felt's gross profit has averaged 40% of selling price.

Instructions
Compute the estimated cost of inventory burned, and give entries as of December 31, 2010 to close merchandise accounts.

Part B-
When you undertook the preparation of the financial statements for Telfer Company at January 31, 2011, the following data were available:
At Cost At Retail
Inventory, February 1, 2010 \$70,800 \$ 98,500
Markdowns 35,000
Markups 63,000
Markdown cancellations 20,000
Markup cancellations 10,000
Purchases 219,500 294,000
Sales 345,000
Purchases returns and allowances 4,300 5,500
Sales returns and allowances 10,000

Instructions
Compute the ending inventory at cost as of January 31, 2011, using the retail method which approximates lower of cost or market. Your solution should be in good form with amounts clearly labeled.

Solution Preview

Note: Each part of the case is independent of each other.

Part A-
On December 31, 2010 Felt Company's inventory burned. Sales and purchases for the year had been \$1,400,000 and \$980,000, respectively. The beginning inventory (Jan. 1, 2010) was \$170,000; in the past Felt's gross profit has averaged 40% of selling price.

Instructions
Compute the estimated cost of inventory burned, and give entries as of December 31, 2010 to close merchandise accounts.

The gross profit is 40%, so the cost of goods sold is 60%. Based on sales of \$1,400,000, the cost of goods sold = 1,400,000 X 60% = 840,000
Total inventory available = ...

Solution Summary

The solution explains how to calculate the estimated cost of inventory burned and ending inventory.

\$2.19