Comet 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

Comet 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

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To find the estimated cost of the May 31 inventory, we need to first find the cost of goods sold (COGS) for the month of May. We can do this using the following equation:

COGS = Beginning Inventory + Purchases - Ending Inventory

We know that the rate of markup on cost is 50 percent, so the cost of goods sold can be found by dividing total sales by 1.5 (100% + 50% markup):

COGS = Total Sales / 1.5

From the income statement, we can see that total sales for May were $120,000. Therefore:

COGS = $120,000 / 1.5 = $80,000

Next, we can use the COGS equation to solve for the estimated cost of the May 31 inventory:

Estimated Ending Inventory = Beginning Inventory + Purchases - COGS

We are not given the beginning inventory, but we can solve for it using the inventory equation:

Beginning Inventory = Ending Inventory from Previous Month

We don't have the previous month's ending inventory, so we'll assume it was $28,000 (the same as the current month's beginning inventory). We can now solve for purchases:

Purchases = COGS - Beginning Inventory + Ending Inventory

Purchases = $80,000 - $28,000 + Ending Inventory

Purchases = $52,000 + Ending Inventory

We are still missing the ending inventory, so we need to make an estimate. We can use the gross profit method by multiplying total sales by the gross profit ratio:

Gross Profit Ratio = Gross Profit / Total Sales

From the income statement, we can find that the gross profit for May was $48,000. Therefore:

Gross Profit Ratio = $48,000 / $120,000 = 0.4

We can now estimate the ending inventory by multiplying total estimated sales for June by the gross profit ratio:

Estimated Ending Inventory = Total Estimated Sales x Gross Profit Ratio

We don't have any information about June sales, so we'll assume they will be the same as May. Therefore:

Estimated Ending Inventory = $120,000 x 0.4 = $48,000

Finally, we can substitute the values we've found into the purchases equation:

Purchases = $52,000 + $48,000
Purchases = $100,000

And then we can use the ending inventory equation:

Estimated Ending Inventory = Beginning Inventory + Purchases - COGS
$48,000 = $28,000 + $100,000 - $80,000

Therefore, the estimated cost of the May 31 inventory is $28,000.

Comet Company Prepares Monthly Income Statements