Posted: April 20th, 2016

# Determine the inventory loss as a result of the fire, using the gross profit method ??

Decision Making Across the Organization BYP6 4
On April 10, 2008, fire damaged the office and warehouse of Inwood Company. Most of the accounting records were destroyed , but the following account balances were determined as of March 31, 2008: Merchandise Inventory, January 1, 2008, \$80,000; Sales (January 1 March 31, 2008), \$180,000; Purchases (January 1 March 31, 2008) \$94,000.
The company s fiscal year ends on December 31. It uses a periodic inventory system. From an analysis of the April bank statement, you discover cancelled checks of \$4,200 for cash purchases during the period April 1 10. Deposits during the same period totaled \$18,500. Of that amount, 60% were collections on accounts receivable, and the balance was cash sales. Correspondence with the company s principal suppliers revealed \$12,400 of purchases on account from April 1 to April 10. Of that amount, \$1,600 was for merchandise in transit on April 10 that was shipped FOB destination. Correspondence with the company s principal customers produced acknowledgements of credit sales totaling \$37,000 from April 1 to April 10. It was estimated that \$5,600 of credit sales will never b acknowledged or recovered from customers.
Inwood Company reached an agreement with the insurance company that its fire loss claim should be based on the average of the gross profit rates for the preceding 2 years. The financial statements for 2006 and 2007 showed the following data.
2007 2006
Net sales \$600,000 \$480,000
Cost of Goods purchased 404,000 356,000
Beginning inventory 60,000 40,000
Ending inventory 80,000 60,000
Inventory with a cost of \$17,000 was salvaged from the fire
Instructions
Determine the balances in (1) sales and (2) purchases at April 10.
Determine the average profit rate for the years 2006 and 2007. (Hint: find the gross profit rate for each year and divide the sum by 2).
Determine the inventory loss as a result of the fire, using the gross profit method

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