Question

Underwater, Inc. had a flood in its plant that destroyed most of its inventory. Its records show that beginning inventory was $20,000. Underwater made purchases of $250,000 and sales of $300,000 during the year. Its normal gross profit percentage is 35%. It can sell some of its damaged inventory for $7,500. The insurance company will reimburse Underwater for 75% of its loss. What amount should Underwater report as loss from the flood?

Answer 1

Answer:

$ 16,875

Explanation:

Beginning Inventory $  20,000  

Purchases                 $ 250,000  

Sales                         $ 300,000  

Gross Profit:                          35%  

 

Inventory before flood determination:

Cost of Sales ( 100% - 35% ) x Sales  

 

= ( 1 - 0.35 ) x 300.000   --->   Cost of Sales

=  195,000  

 

Sales         300,000.00         100%

Cost         195,000.00         65%

Gross Profit: 105,000.00         35%

 

Beginning Inventory    $    20,000  

Purchases               $  250,000  

Sales                            -$   195,000  

Inventory before flood:  $  75,000  

 

Inventory before flood:    $     75,000  

Inventory damaged sold: $    -7,500  

Net Loss:                    $    67,500

Insurance Reimbursement: $ 50,625.00 ( 67,500 x 75% )

 

Net Loss from flood: $ 16,875 ( 67,500 - 50,625 )