Chapter 7, Problem 7.7APR

### Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

Chapter
Section

### Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

# Retail method; gross profit methodSelected 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, May 1 $880,000 Transactions during May through November: Purchases(net) 9,500,000 Sales 15,800,000 Estimated gross profit rate 38% Instructions1. 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?

(a)

To determine

Retail method

This method of estimating cost of inventory requires cost and retail prices to be maintained for goods available for sale. The ending inventory cost is estimated by converting ending inventory at retail using ratio of cost to retail price.

Gross profit method

This method is use the estimated gross profit for the period to evaluate and ascertain the ending inventory for the period. The gross profit for the period is calculated from the preceding year, which is adjusted for any current period changes in the sales and cost price of the inventory.

To estimate: the cost of merchandise inventory at August 31 of CT company.

Explanation

Firstly, the total merchandise available for sale at cost and retail prices is determined. Then ratio of cost to retail ratio is determined by dividing me...

(2.a)

To determine

To estimate: the cost of merchandise inventory as on November 30 of R Company.

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