10E - Intermediate Accounting (Kieso)

Question

During 2017, Pretenders Furniture Company purchases a carload of wicker chairs. The manufacturer sells the chairs to Pretenders for a lump sum of \(59,850 because it is discontinuing manufacturing operations and wishes to dispose of its entire stock. Three types of chairs are included in the carload. The three types and the estimated selling price for each are listed below. Type No. of Chairs Estimated Selling Price Each Lounge chairs 400 \)90 Armchairs 300 80 Straight chairs 700 50 During 2017, Pretenders sells 200 lounge chairs, 100 armchairs, and 120 straight chairs. Instructions What is the amount of gross profit realized during 2017? What is the amount of inventory of unsold straight chairs on December 31, 2017?

Step-by-Step Solution

Answer

The gross profit during 2017 equals $11,840, and value of inventory of unsold chairs equals $18,270.

Calculation of cost per unit for different type of chairs

Cost per unit of chairs is calculated as follows: 

Type	No. of Chairs	Estimated Selling Price Per Each	Total Sales Price	Relative Sales Price	Total Cost	Cost Allocated to Lots	Cost Per Unit
Lounge chairs	$400	$90	$36,000	36000/95000	$59,850	$22,680	$56.70
Armchairs	300	80	24,000	24000/95000	$59,850	15,120	50.40
Straight chairs	700	50	35,000	35000/95000	$59,850	$22,050	31.50
Total			$95,000

Calculation of gross profit

Gross profit is calculated as follows:

 

Type	Units Sold	Estimated Selling Price Per Each	Cost Per Unit	Sales	Total Cost	Gross Profit
Lounge chairs	200	$90	$56.70	$18,000	11340	$6,660
Armchairs	100	80	50.40	8000	5040	2960
Straight chairs	120	50	31.50	6000	3780	2220
Total				$32,000	20160	$11,840

Calculation of unsold inventory of straight chairs

Unsold inventory of straight chairs is calculated as follows: 

$\begin{array}{rcl}\mathrm{Unsold} \mathrm{inventory} \mathrm{of} \mathrm{straight} \mathrm{chairs}& =& \left(\mathrm{Units} \mathrm{purchased}-\mathrm{Units} \mathrm{sold}\right)\times \mathrm{Price} \mathrm{per} \mathrm{unit}\\ & =& \left(700-120\right)\times \$31.50\\ & =& \$18,270\end{array}$

Thus, the gross profit is $11,840 and unsold inventory of straight chairs is $18,270.