Question

Prior to a fire that destroyed most of its inventory, Tejada Company had inventory purchases during

the period of $40,000 and sales of $125,000. Tejada began the period with $95,000 in inventory. Tejada's

typical gross profit percentage is 20 percent. Inventory that cost $5,000 survived the fire. Using the gross

profit method, estimate the inventory loss from the fire. (Show your work.)

Assuming the ending inventory for 2013 was overstated, indicate whether each of the following will be:

a.	Understated	c.	Not affected
b.	Overstated

1. Beginning inventory for 2014

2. Cost of goods sold for 2013

3. Stockholders’ equity at the end of 2014

4. Income before income taxes for 2014

5. Stockholders’ equity at the end of 2013

6. Cost of goods sold for 2014

Answer 1

1.

Beginning inventory	$              95,000
Add: Purchases	$              40,000
Less: Cost of goods sold (125,000*80%)	$          (100,000)
Less:Inventory not affected fire	$              (5,000)
inventory loss from the fire	$              30,000

2.

Beginning inventory for 2014	Overstated
2. Cost of goods sold for 2013	Understated
3. Stockholders’ equity at the end of 2014	Overstated
4. Income before income taxes for 2014	Not affected
5. Stockholders’ equity at the end of 2013	Overstated
6. Cost of goods sold for 2014	Not affected

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