Question

3: Gross profit method.

On December 31, 2017 Alex Company's inventory burned. Sales and purchases for the year had been $1,400,000 and $980,000, respectively. The beginning inventory (Jan. 1, 2017) was $170,000; in the past Felt's gross profit has averaged 40% of selling price.

Instructions: Compute the estimated cost of inventory burned, and give entries as of December 31, 2017 to close merchandise accounts.

Answer 1

Step-1:Calculate cost of goods sold
As per gross profit method,
Sales				$       14,00,000
Less:Gross Profit		(1400000*40%)		$          5,60,000
Cost of good sold				$          8,40,000
Sttep-2:Calculate Ending
Beginning Inventory				$          1,70,000
Inventory purchased				$          9,80,000
Inventory available for sale				$       11,50,000
Cost of goods sold				$        -8,40,000
Ending Inventory				$          3,10,000
Thus, Estimted cost of inventory burned is				$          3,10,000
Entry to close merchandise accounts :
Date		Accounts			Debit	Credit
December 31 2017		Loss of Inventory			$ 3,10,000
		Merchandise Inventory				$ 3,10,000
		(To close merchandise inventory due to loss by fire)