[Jasminekoko]

Hi guys,

I have tried to grasp this question and still not be able too. Could someone please help me with this.

What I don’t understand is why the markup on sale price is 40,000x.4? I thought it was 40,000/1.4 to get to the cost of goods sold? I am confused. Thank you.

CPA-00130

The following items were included in Opal Co.’s inventory account at December 31:

Merchandise out on consignment, at sales price, including 40% markup on selling price $40,000

Goods purchased, in transit, shipped F.O.B. shipping point 36,000

Goods held on consignment by Opal 27,000

By what amount should Opal’s inventory account at December 31 be reduced?

a. $67,000

b. $43,000

c. $51,000

d. $103,000

Explanation

Choice “b” is correct. The 40% markup and the goods held on consignment (not belonging to Opal) must be eliminated to record inventory at cost. The $36,000 of goods shipped FOB shipping point should be included in inventory (title has passed to Opal). 40% x $40,000 = $16,000 plus $27,000 = $43,000.

Choice “a” is incorrect. Only the 40% markup on goods out on consignment must be eliminated to record inventory at cost. The $36,000 should be included in inventory (title has passed to Opal).

Choice “c” is incorrect. Only the 40% markup on goods out on consignment must be eliminated to record inventory at cost.

Choice “d” is incorrect. The 40% markup, not the 60% cost on goods out on consignment, must be eliminated.

[mla1169]

If the problem said it included markup of COST, you'd be correct to divide by 1.4. The problem tells you the markup is equal to 40% of the selling cost, or $16k, making the cost of goods sold $24k.

FAR- 77
AUD -49, 71, 84
REG -56,75!
BEC -75

Massachusetts CPA (non reporting) since 3/12.

[Jasminekoko]

Thank you. It cleared up. 🙂

[Author]

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