Question

Ellis Company had January 1 inventory of $150,000 when it adopted dollar-value LIFO. During the year, purchases were $900,000 and sales were $1,500,000. December 31 inventory at year-end prices was $189,750, and the price index was 110. What is Ellis Company's gross profit?

a. $624,750.
b. $450,000.
c. $550,250.
d. $600,000.

Answer 1

To calculate the gross profit, we need to determine the cost of goods sold (COGS) and subtract it from the sales revenue. The COGS can be calculated by subtracting the base-year inventory from the sum of the January 1 inventory and purchases. The gross profit is then obtained by subtracting the COGS from the sales revenue.

Step-by-step explanation:

To calculate the gross profit of Ellis Company, we need to determine the cost of goods sold (COGS) and subtract it from the sales revenue. First, we need to calculate the ending inventory at base-year prices using the price index. The December 31 inventory at year-end prices of $189,750 divided by the price index of 110 gives us a base-year inventory of $172,500. Next, we can calculate the COGS by subtracting the base-year inventory from the sum of the January 1 inventory and purchases: $150,000 + $900,000 - $172,500 = $877,500. Finally, we can calculate the gross profit by subtracting the COGS from the sales revenue: $1,500,000 - $877,500 = $622,500.