The Shelly Corporation is an importer and wholesaler. Its merchandise is purchased from several suppliers and is warehoused by Shelly Corporation until sold to consumers. In conducting her audit for the year ended June 30, 2007 the corporation’s CPA determined that the system of internal control was good. Accordingly, she observed the physical inventory at an interim date, May 31, 2007, instead of at year-end.

The CPA obtained the following information from the general ledger:

Inventory, July 1, 2006 ...............$ 87,500

Physical inventory, May 31, 2007 .......... 95,000

Sales for 11 months ended May 31, 2007 ........ 840,000

Sales for year ended June 30, 2007 ......... 960,000

Purchases for 11 months ended May 31,

2007 (before audit adjustments) ........... 675,000

Purchases for year ended June 30, 2007

(before audit adjustments) .............. 800,000

The CPA’s audit disclosed the following information:

Shipments received in May and included in

the physical inventory but recorded as

June purchases .................. $7,500

Shipments received in unsalable condition

and excluded from physical inventory;

credit memos had not been received nor

had chargebacks to vendors been recorded:

Total at May 31, 2007 ................... $1,000

Total at June 30, 2007 (including the

May unrecorded chargebacks) ............. $1,500

Deposit made with vendor and charged to

purchases in April 2007. Product was

shipped in July 2007. ................. $2,000

Deposit made with vendor and charged

to purchases in May 2007. Product

was shipped, FOB destination, on

May 28, 2007, and was included in

May 31, 2007 physical inventory as

goods in transit. ................... $5,500

Through the carelessness of the receiving

department, a June shipment was

damaged by rain. This shipment

was later sold in June at its cost of $10,000.

Required

In audit engagements in which interim physical inventories are observed, a frequently used auditing procedure is to test the reasonableness of the year-end inventory by the application of gross profit ratios. Prepare in good form the following schedules:

1. Computation of the gross profit ratio for 11 months ended May 31, 2007.

2. Computation by the gross profit ratio method of cost of goods sold during June 2007.

3. Computation by the gross profit ratio method of June 30, 2007 inventory.