Question

A company through no fault of its own, lost an entire building due to an earthquake on May 1 , 2024. In preparing its insurance claim on the inventory loss, the company developed the following data: Inventory January 1 , 2024 , $370,000; sales and purchases from January 1,2024 , to May 1,2024,$1,130,000 and $895,000, respectively. The company consistently reports a 35% gross profit. The estimated inventory on May 1,2024 , is:

a. $495,500.
b. $590,500.
c. $531,700.
d. $530,500.

Answer 1

The estimated inventory loss on May 1, 2024, is calculated by subtracting the cost of goods sold from the cost of goods available for sale. The calculations show $530,500 as the estimated inventory at the time of the earthquake.

Step-by-step explanation:

The estimated inventory loss on May 1, 2024, would be $531,700:

Starting with the opening inventory of $370,000, the company made purchases of $895,000. So, the cost of goods available for sale was $1,265,000. Next, we will calculate the cost of goods sold (COGS). Given that the company has a 35% gross profit margin, this means the cost represents 65% (100% - 35%) of sales. The sales from January 1, 2024, to May 1, 2024, were $1,130,000.

To estimate the COGS, we can take 65% of sales, which is $1,130,000 x 65% = $734,500. To estimate the inventory at the time of the earthquake, we subtract the COGS from the cost of goods available for sale: $1,265,000 (goods available) - $734,500 (COGS) = $530,500. So the correct answer is d. $530,500.