Question

Gross Profit Method: Estimation of Flood Loss

On November 21, 2016, a flood at Hodge Company's warehouse caused severe damage to its entire inventory of Product Tex. Hodge estimates that all usable damaged goods can be sold for $8,400. The following information was available from Hodge's accounting records for Product Tex:

Inventory at November 1, 2016		$116,000
Purchases from November 1, 2016, to date of flood		142,000
Net sales from November 1, 2016, to date of flood		235,000

Based on recent history, Hodge had a gross margin (profit) on Product Tex of 30% of net sales.

Required:

1. Prepare a schedule to calculate the estimated loss on the inventory in the flood, using the gross profit method.

HODGE COMPANY
Calculation of Estimated Loss on Inventory in the Flood Using Gross Margin (Profit) Method
November 21, 2016
		$
		$
Estimated cost of goods sold
	$
		$
		$

2.	The gross profit method may not provide an accurate estimate of ending inventory when:

Answer 1

Answer
Part-1
HODGE Company
Calculation of Estimated Loss on Inventory
in the Flood Using Gross Margin (Profit) Method
November 21, 2016
Inventory at November 1, 2016		$     116,000
Purchases from November 1, 2016 to date of flood		$     142,000
Cost of goods available for sale		$     258,000
Estimated cost of goods sold:
Net sales from November 1, 2016 to date of flood	$     235,000
Less: Estimated gross margin (258,000 x 30%)	$       77,400	$     157,600
Estimated cost of inventory at date of flood		$     100,400
Less: Salvage goods		$         8,400
Estimated loss on inventory in the flood		$       92,000
Part 2
All of the choices may result in inaccurate estimates of ending inventory when using the gross profit method