Question

On January 1, a store had inventory of $48,000. January purchases were $46,000 and January sales were $95,000. On February 1 a fire destroyed most of the inventory. The rate of gross profit was 25% of cost. Merchandise with a selling price of $5,000 remained undamaged after the fire. Compute the amount of the fire loss, assuming the store had no insurance coverage. Label all figures.

Answer 1

The correct answer is $14,000.

Step-by-step explanation:

According to the scenario, the computation of the given data are as follows:

We can calculate the fire loss by using following formula:

Fire loss = Beginning inventory + Jan. Purchase - Cost of sale - Cost of undamaged inventory

Where, Cost of sale = $95,000 ÷ 125% = $76,000

And cost of undamaged inventory = $5,000 ÷ 125% = $4,000

By putting the value, we get

Fire loss = $48,000 + $46,000 - $76,000 - $4,000

= $14,000