Question

California Inc., through no fault of its own, lost an entire plant due to an earthquake on May 1, 2021. In preparing its insurance claim on the inventory loss, the company developed the following data: Inventory January 1, 2021, $320,000; sales and purchases from January 1, 2021, to May 1, 2021, $1,260,000 and $905,000, respectively. California consistently reports a 35% gross profit. The estimated inventory on May 1, 2021, is: Multiple Choice $406,000. $407,200. $371,000. $466,000.

Answer 1

Answer:

$406,000

Explanation:

The calculation of estimated inventory is shown below:-

Inventory as at May 1 =  Inventory as at January 1 + purchase + Gross profit - Sales

= $320,000 + $905,000 + ($1,260,000 × 35%) - $1,260,000

= $1,225,000 + $441,000 - $1,260,000

= $1,666,000 - $1,260,000

= $406,000

So, for computing the estimated inventory on May 1, 2021 we simply applied the above formula.