Final answer:
To estimate the ending inventory destroyed by fire for Norton Company in October using the gross profit method, we need to calculate the cost of goods sold (COGS) and the ending inventory. We can use the formula COGS = Net Sales - Gross Profit to calculate COGS. then we can calculate the ending inventory by subtracting the COGS from the sum of the beginning inventory and net purchases. The estimated ending inventory destroyed by fire is $392,000.
Step-by-step explanation:
To estimate the ending inventory destroyed by fire, we can use the gross profit method. the gross profit method calculates the cost of goods sold (COGS) based on the percentage markup on cost. First, we need to calculate the cost of goods sold (COGS) using the formula:
COGS = Net Sales - Gross Profit
Next, we can calculate the ending inventory by subtracting the COGS from the sum of the beginning inventory and net purchases:
Ending Inventory = Beginning Inventory + Net Purchases - COGS
Using the given information:
Beginning Inventory: $200,000
Net Purchases: $600,000
Net Sales: $1,200,000
Percentage markup on cost: 66.67%
We can calculate the COGS:
COGS = $1,200,000 * (1 - 66.67%) = $396,000
Next, calculate the ending inventory:
Ending Inventory = $200,000 + $600,000 - $396,000 = $404,000
However, the ending inventory given in the question is $12,000. To find the estimated ending inventory destroyed by fire, we subtract the undamaged inventory ($12,000) from the calculated ending inventory:
Estimated Ending Inventory Destroyed by Fire = $404,000 - $12,000 = $392,000