Question

A substantial portion of inventory owned by Prentiss Sporting Goods was recently destroyed when the roof collapsed during a rainstorm. Prentiss also lost some of its accounting records. Prentiss must estimate the loss from the storm for insurance reporting and financial statement purposes. Prentiss uses the periodic inventory system. The following accounting information was recovered from the damaged records:

Beginning inventory	$	202,500
Purchases to date of storm		403,200
Sales to date of storm		600,100

The value of undamaged inventory counted was $121,423. Historically, Prentiss’s gross margin percentage has been approximately 23 percent of sales.

Required
Estimate the following:

a. Gross margin in dollars.
  

b. Cost of goods sold in dollars.
  

c. Ending inventory.
  

d. Amount of lost inventory.
  

Answer 1

A) Gross margin

Gross Margin = (Total Revenue – Cost of Goods Sold)/Total Revenue).

here, percentage of gross margin is 23 % on sales

= $600,100×23%

=$600,100×23/100

Gross margin is = $138,023 dollars

B) Cost of goods sold

1. Add the cost of beginning inventory to the cost of purchases during the period. This is the cost of goods available for sale.
2. Multiply the gross profit percentage by sales to find the estimated cost of goods sold.
3. Subtract the cost of goods available for sold from the cost of goods sold to get the ending inventory.

Starting inventory + purchases - ending inventory = cost of goods sold

The valueof undamaged inventory treated as ending inventory= $121,423

COGS=$202,500+$403,200-$121,423.

COGS= $484,277

C) Ending inventory

Formula= Beginning Inventory + Net Purchases - Cost of Goods Sold (or COGS) = Ending Inventory.

= $202,500+$403,200-$484,277

Ending inventory=$121,423.

D) Amount of lost of inventory

=