Question

I already have the answer but would like an in depth solution with detailed explanation.

The Denver Company uses the gross profit method to estimate its inventory in interim financial statements. The markup on cost is 40%. The following information is available:

January 1, 2004, inventory balance	$12,500
Purchases	25,000
Sales during January	21,000

The estimated inventory at January 31, 2004, is

a.	$22,500
b.	$25,900
c.	$16,500
d.	$16,100

Answer 1

cost of goods sold + ( markup % * cost of goods sold ) = sales

let cost of goods sold be X.

X + ( 40% * X ) = $21,000

X + 0.4X = $21,000

1.4X = $21,000

X = $21,000 / 1,4

X = $15,000

cost of goods sold = $15,000

closing inventory = opening inventory + purchases - cost of goods sold

closing inventory = $12,500 + $25,000 - $15,000 = $22,500

estimated inventory at January 31, 2004, is $22,500 ( option a )