The following information appears in Gordon Company's records for the year ended December 31: On December 31, a physical inventory revealed that the ending inventory was only $210,000. Gordon's gross profit on net sales has remained constant at 30 percent in recent years. Gordon suspects that some inventory may have been pilfered by one of the company's employees. At December 31, what is the estimated cost of missing inventory?

Question

The following information appears in Gordon Company's records for the year ended December 31:  On December 31, a physical inventory revealed that the ending inventory was only $210,000. Gordon's gross profit on net sales has remained constant at 30 percent in recent years. Gordon suspects that some inventory may have been pilfered by one of the company's employees. At December 31, what is the estimated cost of missing inventory?

Quizplus · Accepted Answer

First, we need to determine the cost of goods sold (COGS) using the gross profit percentage. 
Net sales = $900,000 
Gross profit = 30% 
COGS = $630,000 (30% of $900,000)

Next, we can use the formula for determining the estimated cost of missing inventory: 
Estimated cost of missing inventory = (Ending inventory per books - Actual ending inventory) + Cost of goods sold 
Estimated cost of missing inventory = ($300,000 - $210,000) + $630,000 
Estimated cost of missing inventory = $720,000 - $210,000 
Estimated cost of missing inventory = $510,000

Therefore, the estimated cost of missing inventory is $82,500 (Choice B).

The Following Information Appears in Gordon Company's Records for the Year