Gross Profit Method: Estimation of Fire Loss

Gross Profit Method: Estimation of Fire Loss

1.
Gross Profit Method: Estimation of Fire Loss
On January 20, 2017,
Stewart Company’s records revealed the following information:

Inventory,
July 1, 2016

$ 55,300

Purchases,
July 1, 2016–January 20, 2017

382,100

Sales,
July 1, 2016–January 20, 2017

592,000

Purchases
returns

10,400

Purchases
discounts taken

6,800

Freight-in

3,500

Sales
returns

6,600

A fire destroyed the
entire inventory on January 20, 2017, except for purchases in transit, FOB
shipping point of $6,000, and goods having a selling price of $4,700 that were
salvaged from the fire. The salvaged goods had an estimated salvage value of
$2,900. The average gross profit on net sales in previous periods was 40%.
1.
Required:

Compute the cost of the
inventory lost in the fire.

STEWARD COMPANY

Computation of Cost of Inventory
Lost in Fire

January 20, 2017

Schedule 1

Inventory, July 1, 2016

$

Purchases (less $6,000 in transit)

Less: Purchases returns

Less: Purchases discounts taken

Freight-in

Cost of goods available for sale
and on hand

$

Schedule 2

Sales

$

Less: Sales returns

Net sales

$

Schedule 3

Cost of goods sold

$

Cost of goods salvaged

$

Schedule 4

Inventory lost in the fire:

Cost of goods available for sale
and on hand

$

Less: Cost of goods sold

Less: Cost of goods salvaged

Inventory lost

$

2. If a company discloses that it uses the
_________
perpetual
periodic
direct
allowance
inventory
method, it is
_________
estimating
physically counting
controlling
the
ending inventory reported in its interim financial reports which may cause
concern about the accuracy of the reported amounts.

 

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