On January 1, 2007, the merchandise inventory of Colaw, Inc.was $800,000.During 2007 Colaw purchased $1,600,000 of merchandise and recorded sales of $2,000,000.The gross profit rate on these sales was 25%.What is the merchandise inventory of Colaw at December 31, 2007?
A)$400,000.
B)$500,000.
C)$900,000.
D)$1,500,000.

Question

Quizplus · Accepted Answer

To find the ending merchandise inventory, we need to use the formula:
Ending inventory = Beginning inventory + Purchases - Cost of goods sold

We already know the beginning inventory was $800,000 and the purchases were $1,600,000. To find the cost of goods sold, we need to first find the gross profit.

Gross profit = Sales x Gross profit rate
Gross profit = $2,000,000 x 0.25
Gross profit = $500,000

Cost of goods sold = Sales - Gross profit
Cost of goods sold = $2,000,000 - $500,000
Cost of goods sold = $1,500,000

Now we can find the ending inventory:
Ending inventory = Beginning inventory + Purchases - Cost of goods sold
Ending inventory = $800,000 + $1,600,000 - $1,500,000
Ending inventory = $900,000

Therefore, the merchandise inventory of Colaw at December 31, 2007 was $900,000, which is answer choice C.

On January 1, 2007, the Merchandise Inventory of Colaw, Inc