ment had recorded the purchase as an account payable on 28 D

ment had recorded the purchase as an account payable on 28 December 20X4. Title to the inventory had passed to Zhang on 27 December, the date that the supplier had loaded the shipment onto the shipping company\'s trucks. Zhang uses a periodic inventory method. Required: 1. 2. What impact did the errors have on each company\'s financial statements? What correcting entry should each company make when the error is discovered? A8-19 Gross Margin Method: You are auditing the records of Lin Corp. The company took a physical inventory under your observation. However, the valuations have not been completed. The records of the company provide the following data: sales, $400,000 (gross); returned sales, $17,500 (returned to stock); purchases (gross), $250,000; beginning inventory $160,000; freight-in, $8,000, and purchase returns and allowances, $7,000. The gross margin last period was 25% of net sales; you anticipate that it will average 30% for the year under audit. Required: Estimate the cost of the ending inventory and the cost of sales using the gross margin method. Show all calculations. Solution ? ? A8-20 Gros, a bookrtailer.nr The manager of Seaton Books Ltd., a book retailer, requires an estimate of the inventory cost for a quarterty 21 March 20X5. In the past, the gross margin method was used because of

Solution

Gross Sales = 400000
Sales Return = 17500
Gross Purchases = 250000
Beginning Inventory = 160000
Freight In = 8000
Purchase Return & Allowances = 7000

Net Sales = Gross Sales - Sales Return
Net Sales = 400000 - 17500
Net Sales = 382500

Gross Margin = 30% of Net Sales
Gross Margin = 30% of 382500
Gross Margin = 114750

Gross Margin = Net Sales - Cost of Goods Sold
114750 = 382500 - Cost of Goods Sold
Cost of Goods Sold = 382500 - 114750
Cost of Goods Sold = 267750

Cost of Goods Sold = Beginning Inventory + Net Purchases - Ending Inventory
Cost of Goods Sold = Beginning Inventory + (Gross Purchases + Freight In -Purchase Return & Allowances) - Ending Inventory
267750 = 160000 + (250000 + 8000 - 7000) - Ending Inventory
267750 = 160000 + 251000 - Ending Inventory
267750 = 411000 - Ending Inventory
Ending Inventory = 411000 - 267750
Ending Inventory = 143,250