Question

On November 15, 2020, a fire destroyed Youngstown Inc.’s warehouse where inventory is stored. It is estimated that $20,000 can be realized from sale of usable but damaged inventory. The accounting records concerning inventory reveal the following. Based on recent records, gross margin has averaged 35% of net sales.

Inventory at Nov. 1, 2020	$240,000
Purchases from Nov. 1, 2020, to Nov. 15, 2020	280,000
Net sales from Nov. 1, 2020, to Nov. 15, 2020	400,000

a. Calculate the estimated loss of inventory using the gross profit method.
b. Assume instead that the markup is 35% of cost. Estimate the loss of inventory using the gross profit method.

• Do not round the gross profit percentage used in your calculations.
• Round your final answers below to the nearest dollar.

a. Estimated loss of inventory assuming a 35% markup on sales:

b. Estimated loss of inventory assuming a 35% markup on cost:

Answer 1

Answer of A

Total Inventory available for sales:

Inventory on 1, November $ 240,000

Add: Purchased $ 280,000

Total Goods $ 520,000

Now next we find out cost of sales

Cost of sales= Sales - 35% Profit

= $ 400,000 - $ 140,000

= $ 260,000

Inventory on date fire = Inventory for sales - cost of sales

= $520,000 - $ 260,000

= $ 260,000

Loss of Goods = Inventory on date fire - sales value of goods damaged

= $ 260,000 - $20,000

= $ 240,000.

So Estimated loss of Inventory $ 240,000.

b. Estimated loss of inventory assuming a 35% markup on cost:

Total Inventory available for sales:

Inventory on 1, November $ 240,000

Add: Purchased $ 280,000

Total Goods $ 520,000

Now next we find out cost of sales

Suppose Cost is $ 100

+ 35 % Profit is   $ 35

   So, Sales is     $ 135

When Sales are $ 135    then      Cost of sales is $ 100

So, When Sales $ 4,00,000   then   what cost of sales (?)

= 400,000*100/135

  = $ 296,296 Cost of sales

Inventory on date fire = Inventory for sales - cost of sales

= $520,000 - $ $ 296,296

= $ 223,704

Loss of Goods = Inventory on date fire - sales value of goods damaged

= $ 223,704 - $20,000

= $ 203,704.

So Estimated loss of Inventory $ 203,704.