Question

On March 15, a fire destroyed Interlock Company's entire retail inventory. The inventory on hand as of January 1 totaled $3,300,000. From January 1 through the time of the fire, the company made purchases of $1,366,000, incurred freight-in of $156,000, and had sales of $2,420,000. Assuming the rate of gross profit to selling price is 30%, what is the approximate value of the inventory that was destroyed?

A) $4,822,000.
B) $4,096,000.
C) $3,128,000.
D) $2,972,000.

Answer 1

To determine the value of the inventory lost in the fire at Interlock Company, we calculated the cost of goods available for sale and subtracted the cost of goods sold, which we derived using the given gross profit rate. The approximate value of the destroyed inventory is $3,128,000.

Step-by-step explanation:

To estimate the value of the inventory destroyed by the fire at Interlock Company, we need to calculate the cost of goods sold (COGS) and subtract it from the cost of goods available for sale. The cost of goods available for sale is calculated by adding the beginning inventory to the purchases and the freight-in costs. After finding the COGS using the gross profit rate, we can approximate the value of the lost inventory.

Step 1: Calculate the cost of goods available for sale:

• Beginning inventory (January 1): $3,300,000
• Add: Purchases: $1,366,000
• Add: Freight-in: $156,000

Cost of goods available for sale: $3,300,000 + $1,366,000 + $156,000 = $4,822,000

Step 2: Calculate the sales value of the lost inventory assuming a 30% gross profit rate:

Gross profit = Sales x Gross profit rate = $2,420,000 x 30% = $726,000

Step 3: Calculate COGS:

COGS = Sales - Gross profit = $2,420,000 - $726,000 = $1,694,000

Step 4: Estimate the value of the inventory destroyed:

Inventory Destroyed = Cost of goods available for sale - COGS = $4,822,000 - $1,694,000 = $3,128,000

Therefore, the approximate value of the inventory that was destroyed is $3,128,000, which corresponds to option C).