Question

Fireworks, Inc., had an explosion in its plant that destroyed most of its inventory. Its records show that beginning inventory was $40,000. Fireworks made purchases of $480,000 and sales of $620,000 during the year. Its normal gross profit percentage is 25%. It can sell some of its damaged inventory for $5,000. The insurance company will reimburse Fireworks for 70% of its loss. What amount should Fireworks report as loss from the explosion?

Answer 1

Answer:

$15,000

Explanation:

The computation is given below:

The goods available for sale is

= $40,000 + $480,000

= $520,000

And the sales is $620,000

So, the gross profit

= $620,000 × 25%

= $155,000

So, the cost of goods sold is

= Sale - Gross profit

= $620,000 - $155,000

= $465,000

Now the ending inventory is

= $520,000 - $465,000

= $55,000

And, the reimbursement amount is

= ($55,000 - $5,000) × 70%

= $35,000

So, the loss from the explosion is

= $55,000 - $5,000 - $35,000

= $15,000