Question

ABC sells products to customers with a warranty. Customers can return the products to ABC for a free replacement within 90 days of purchase. During April 2022, ABC sold 1,500 products to customers. During May, ABC sold 1,800 products to customers. Based on past sales, ABC estimates that 5% of all products sold will be returned for a free replacement. The products cost ABC $20 to produce and they are sold for $35 per item. During April, 100 products were returned and during May, 120 items were returned. As of March 31, 2022, ABC's Warranty Liability had a credit balance of $12,000.

If ABC had an inventory balance of $80,000 on March 31, 2022, what should the inventory balance be on April 30, 2022? No purchases of inventory were made during April or May, 2022.

Answer 1

The inventory balance on April 30, 2022, should be $18,400.

Step-by-step explanation:

To determine the change in inventory balance on April 30, 2022, we need to consider the products sold, products returned, and the cost of the products. In April, ABC sold 1,500 products and 100 items were returned. This means that the net sales for April are 1,500 - 100 = 1,400 products. In May, ABC sold 1,800 products and 120 items were returned. So, the net sales for May are 1,800 - 120 = 1,680 products.

The cost of each product is $20 and they are sold for $35 per item. The cost of the net sales for April is 1,400 * $20 = $28,000 and for May is 1,680 * $20 = $33,600.

To determine the change in inventory balance, we need to subtract the cost of net sales from the initial inventory balance. On March 31, 2022, the inventory balance was $80,000. So, on April 30, 2022, the inventory balance should be $80,000 - $28,000 - $33,600 = $18,400.