On February 26 a hurricane destroyed the entire inventory stored in a warehouse

Question

On February 26 a hurricane destroyed the entire inventory stored in a warehouse owned by the Rockford Corporation. The following information is available from the records of the company's periodic inventory February 26, $490,000 and $690,000, respectively; gross profit ratio, 25%. Estimate the cost of the inventory destroyed by the hurricane using the gross profit method Beginning inventory Plus: Net purchases Cost of goods available for sale Less: Cost of goods sold Net sales Less: Estimated gross profit Estimated cost of goods sold Estimated cost of inventory destroyed

Explanation / Answer

Answer

X + 0.25x = 690000
1.25x = 690000
x = $552000 (Estimated Cost of Goods Sold)

A

Net Sales

690000

B

GP Ratio

25%

C=A/(1.25)

Estimated Cost of Goods Sold

552000

D=C x B

Gross Profit

138000

A

Estimated Cost of Goods Sold (calculated)

552000

B

Gross Profit (calculated)

138000

C=A+B

Net Sales (given in question)

690000

Note: Opening inventory + Purchases – Cost of Goods Sold = Closing Inventory

Beginning Inventory

265000

Plus: Net purchases

490000

Cost of Goods Available for sale

755000

Less: Cost of Goods Sold

Net Sales

690000

Less: Estimated gross profits

138000

Estimated cost of goods sold

552000

Estimated cost of inventory destroyed [755000 – 552000]

203000

A

Net Sales

690000

B

GP Ratio

25%

C=A/(1.25)

Estimated Cost of Goods Sold

552000

D=C x B

Gross Profit

138000

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