The inventory of Faber Company was destroyed by fire on March 1. From an examina

Question

The inventory of Faber Company was destroyed by fire on March 1. From an examination of the accounting records, the following data for the first 2 months of the year are obtained: Sales $51,000, Sales Returns and Allowances $1,000, Purchases $31,200, Freight-in $1,200, and Purchase Returns and Allowances $1,400.

Determine the merchandise lost by fire, assuming:

(a) A beginning inventory of $20,000 and a gross profit rate of 40% on net sales.

(b) A beginning inventory of $30,000 and a gross profit rate of 30% on net sales.

Explanation / Answer

a) Sales                         $51,000 Less:Sales returns and Allowances                        1,000                                     ------------- Net Sales                         50,000                                      ------------- Net Sales - Estimated Gross Profit = Estimated Cost of Goods Sold 50,000 -(50,000*40%)                  = Estimated Cost of Goods sold 50,000-20,000                                = Estimated cost of goods sold 30,000                                           = Estimated Cost of goods sold Beginning Inventory                              $20,000 Purchases       31,200 Freight              1,200                      -----------                       32,400 Less;Purchase Returns            1,400                        ---------- Net Purchases 31,000                        ---------- Cost of goods available for sale = 20,000 + 31,000 = 51,000 Estimated Cost of Ending Inventory= Cost of Goods available for sale - Estimated cost of Goods sold                                                       = 51,000 - 30,000                                                        =$21,000 Merchandise lost by fire = $21,000 b) Beginning Inventory                                 $30,000 Cost of goods available for sale = 30,000 + 31,000=61,000 Estimated cost of goods sold = Net Sales - Estimated Gross Profit                                               =50,000 - (50,000*30%)                                                =50,000 -15,000                                                 =35,000 Estimated cost of Ending inventory= 61,000-35,000                                                      =$26,000 Merchandise lost by fire = $26,000

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