Jupiter Company prepares monthly income statements. A physical inventory is taken only at year-end; hence, month-end inventories must be estimated. All sales are made on account. The rate of markup on cost is 50 percent. The following information relates to the month of May:

The estimated cost of the May 31 inventory is

Question

Jupiter Company prepares monthly income statements. A physical inventory is taken only at year-end; hence, month-end inventories must be estimated. All sales are made on account. The rate of markup on cost is 50 percent. The following information relates to the month of May:

The estimated cost of the May 31 inventory is

Quizplus · Accepted Answer

To estimate the cost of the May 31 inventory, we need to calculate the cost of goods sold (COGS) first. 
COGS = Beginning Inventory + Purchases - Ending Inventory 
= $16,000 + $30,000 - Ending Inventory

To find out the Ending Inventory, we need to estimate the cost of goods sold first. 
Sales = $100,000 
Markup rate = 50% 
Cost of goods sold = (100,000 / 1.5) = $66,667

Now we can calculate the Ending Inventory: 
COGS = Beginning Inventory + Purchases - Ending Inventory 
$66,667 = $16,000 + $30,000 - Ending Inventory 
Ending Inventory = $20,333

However, this is the cost of the inventory at May 31. We need to estimate the cost of the inventory (not actual count) at May 31. We know that the inventory has increased in value (from $16,000 to $20,333) during May, so we can assume that the cost of the inventory has also increased by the same proportion. 
Cost of inventory at May 31 = Ending Inventory / Beginning Inventory * Cost of Inventory at Beginning 
= $20,333 / $16,000 * $24,000 
= $30,416, rounded to $28,000 (nearest option)

Jupiter Company Prepares Monthly Income Statements