Question

The following information is available for October for Barton Company.

Beginning inventory $350,000
Net purchases 1,050,000
Net sales 2,100,000
Percentage markup on cost 66.67%
A fire destroyed Barton's October 31 inventory, leaving undamaged inventory with a cost of $21,000. Using the gross profit method, the estimated ending inventory destroyed by fire is
a. $119,000.
b. $539,000.
c. $560,000.
d. $700,000.

Answer 1

To estimate the ending inventory destroyed by fire, the gross profit method is used, and the calculations lead to a value of $119,000 for the inventory destroyed by fire.

Step-by-step explanation:

To estimate the ending inventory destroyed by fire using the gross profit method, we first need to calculate the gross profit. We have been given a percentage markup on cost of 66.67%. This means that for every $1 of cost, the company adds $0.6667 as markup to determine the selling price.

Therefore, the gross profit can be calculated using the following steps:

1. Calculate the cost of goods available for sale, which is the sum of beginning inventory and net purchases: $350,000 + $1,050,000 = $1,400,000.
2. Calculate the total sales revenue: $2,100,000.
3. Calculate the cost of goods sold (COGS) using the cost plus markup formula: COGS = Sales / (1 + Markup) = $2,100,000 / (1 + 0.6667) = $1,260,000.
4. Deduct the COGS from the cost of goods available for sale to get the estimated ending inventory before the fire: $1,400,000 - $1,260,000 = $140,000.
5. Subtract the value of the undamaged inventory from the estimated ending inventory to find the value destroyed by fire: $140,000 - $21,000 = $119,000.

Therefore, the estimated value of the ending inventory destroyed by fire is $119,000 (option a).