Question

A fire destroyed a warehouse of the Goren Group, Inc., on May 4, 2021. Accounting records on that date indicated the following: Merchandise inventory, January 1, 2021 $ 2,000,000 Purchases to date 5,900,000 Freight-in 500,000 Sales to date 9,200,000 The gross profit ratio has averaged 20% of sales for the past four years.
Required:

Use the gross profit method to estimate the cost of the inventory destroyed in the fire.

Answer 1

Answer:

$1,040,000

Explanation:

The calculation of cost of the inventory is shown below:-

Cost of Goods available for sale = Inventory balance + Purchase to date + Freight In

= $2,000,000 + $5,900,000 + $500,000

= $8,400,000

Cost of Goods Sold = Sales to date - (Sales to date × Gross profits)

= $9,200,000  - ($9,200,000 × 20%)

= $9,200,000 - $1,840,000

= $7,360,000

Estimated loss from fire = Cost of Goods available for sale - Cost of Goods Sold

= $8,400,000 - $7,360,000

= $1,040,000

For computing the estimated loss from fire we simply applied the above formula.