Question

Swifty Company lost most of its inventory in a fire in December just before the year-end physical inventory was taken. Corporate records disclose the following. Inventory (beginning) Purchases Purchase returns $ 79,700 287,900 28,300 Sales revenue Sales returns Gross profit % based on net selling price $413,500 21,200 35 % Merchandise with a selling price of $30,400 remained undamaged after the fire, and damaged merchandise has a net realizable value of $8,900. The company does not carry fire insurance on its inventory. Compute the amount of inventory fire loss. (Do not use the retail inventory method.) Inventory fire loss $

Answer 1

Net sales = Sales revenue - Sales returns
Net sales = $413,500 - $21,200
Net sales = $392,300

Cost of goods sold = Net sales * (1 - Gross profit ratio)
Cost of goods sold = $392,300 * (1 - 0.35)
Cost of goods sold = $254,995

Cost of goods remaining after fire = Selling price of goods remaining after fire * (1 - Gross profit ratio)
Cost of goods remaining after fire = $30,400 * (1 - 0.35)
Cost of goods remaining after fire = $19,760

Net purchases = Purchases - Purchase returns
Net purchases = $287,900 - $28,300
Net purchases = $259,600

Cost of goods damaged by fire = Beginning inventory + Net purchases - Cost of goods sold - Cost of goods remaining after fire
Cost of goods damaged by fire = $79,700 + $259,600 - $254,995 - $19,760
Cost of goods damaged by fire = $64,545

Loss of inventory by fire = Cost of goods damaged by fire - Salvage value of goods damaged by fire
Loss of inventory by fire = $64,545 - $8,900
Loss of inventory by fire = $55,645