The following information was taken from the accounting records of Pembroke Ltd. and Deep River Ltd. at October 31, 2020. The two companies are competitors.

Required

a. Calculate the gross margin, gross margin ratio, and inventory turnover ratio at October 31, 2020, for:

i. Pembroke Ltd.

ii. Deep River Ltd.

b. During the December 31, 2020, inventory count at Deep River Ltd., $86,000 of inventory shrinkage was identified. It has not been recorded in the inventory account.

i. Prepare the entry to record the inventory shrinkage of $86,000.

ii. Recalculate Deep River’s gross margin, gross margin ratio, and inventory turnover ratio after the adjusting journal entry is made. You need to adjust the ending inventory balance for 2020 and the cost of goods sold.

iii. Describe what happened to Deep River’s gross margin ratio and inventory turnover ratio after adjusting for the inventory shrinkage.

c. Which company do you think is doing a better job in terms of managing inventory? Explain your answer.

Transcribed Image Text:

Deep River Ltd. $ 150,000 475,000 4,500,000 Pembroke Ltd. Ending inventory, Oct. 31, 2019 Ending inventory, Oct. 31, 2020 Cost of goods sold, 2020 Sales for 2020 $ 395,000 300,000 5,700,980 6,500,425 7,256,700