Question

A company's store was destroyed by an earthquake on February 10 of the current year. The only information for the current period that could be salvaged included the following: beginning inventory, January 1: $44,000; purchases to date: $198,000; net sales to date: $310,000. Historically, the company's gross profit ratio has been 30%. Estimate the value of the destroyed inventory using the gross profit method.

Answer 1

To estimate the destroyed inventory value, first calculate the estimated COGS by subtracting the estimated gross profit from net sales. Then, add the beginning inventory and purchases, and subtract the estimated COGS to find the inventory value, which in this case is $25,000.

Step-by-step explanation:

To estimate the value of the inventory destroyed by an earthquake on February 10, we can use the gross profit method. First, we calculate the estimated cost of goods sold (COGS). Starting with the net sales to date, which is $310,000, and knowing that the historical gross profit ratio is 30%, we can find the cost of goods sold:

Estimated Gross Profit = Net Sales x Gross Profit Ratio = $310,000 x 0.30 = $93,000.

Estimated COGS = Net Sales - Estimated Gross Profit = $310,000 - $93,000 = $217,000.

Now, to estimate the value of the destroyed inventory, we add beginning inventory and purchases, and then subtract the estimated COGS:

Beginning Inventory + Purchases = $44,000 + $198,000 = $242,000.

Estimated Inventory Value = Beginning Inventory + Purchases - Estimated COGS = $242,000 - $217,000 = $25,000.