Question

Gross Profit Method: Estimation of Flood Loss

On November 21, 2016, a flood at Hodge Company's warehouse caused severe damage to its entire inventory of Product Tex. Hodge estimates that all usable damaged goods can be sold for $9,200. The following information was available from Hodge's accounting records for Product Tex:
Inventory at November 1, 2016 $96,000
Purchases from November 1, 2016, to date of flood 131,000
Net sales from November 1, 2016, to date of flood 250,000
Based on recent history, Hodge had a gross margin (profit) on Product Tex of 30% of net sales.
Required:
1. Prepare a schedule to calculate the estimated loss on the inventory in the flood, using the gross profit method.
HODGE COMPANY
Calculation of Estimated Loss on Inventory
in the Flood Using Gross Margin (Profit) Method
November 21, 2016
$
$
Estimated cost of goods sold
$
$
$
2. The gross profit method may not provide an accurate estimate of ending inventory when:

Answer 1

Hodge Company

Calculation of Estimated Loss on Inventory in the

Flood Using Gross Margin (Profit) Method

November 21, 2016

Inventory at November 1, 2016 $96,000

Purchases from November 1, 2016 $131,000

to date of flood

Cost of goods available for sale $227,000

Estimated cost of goods sold:

Net sales from November 1, 2016 $250,000

to date of flood

Less: Estimated gross margin $75,000 $175,000

(250,000 * 30%)

Estimated cost of inventory at date of flood $52,000

Less: Salvage goods $9,200

Estimated loss on inventory in the flood $42,800