Question

Gross Profit Method: Estimation of Flood Loss On November 21, 2019, a flood at Hodge Company's warehouse caused severe damage to its entire inventory of Product Tex. Hodge estimates that all usable damaged goods can be sold for $8,400. The following information was available from Hodge's accounting records for Product Tex: Inventory at November 1, 2019 Purchases from November 1, 2019, to date of flood Net sales from November 1, 2019, to date of flood $97,000 132,000 221,000 Based on recent history, Hodge had a gross margin (profit) on Product Tex of 30% of net sales. Required: 1. Prepare a schedule to calculate the estimated loss on the inventory in the flood, using the gross profit method. HODGE COMPANY Calculation of Estimated Loss on Inventory in the Flood Using Gross Margin (Profit) Method November 21, 2019 Estimated cost of goods sold

Answer 1

Part 1

HODGE COMPANY Calculation of Estimated Loss on Inventory in the Flood Using Gross Margin (Profit) Method November 21, 2019
Inventory at November 1, 2019		97000
Purchases from November 1, 2019, to date of flood		132000
Cost of goods available for sale		229000
Estimated cost of goods sold
Net sales from November 1, 2019, to date of flood	221000
Less: estimated gross margin (profit)	(66300)	(154700)
Estimated cost of inventory at date of flood		74300
Less: salvage goods		(8400)
Estimated loss on inventory in the flood		$65900

Estimated gross margin (profit) =221000*30% = 66300

Part 2

All of the choices may result in inaccurate estimates of ending inventory when using the gross profit method