Sheffield Company lost most of its inventory in a fire in December just before t

Question

Sheffield 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) $ 79,100

Sales revenue $418,400

Purchases 286,700

Sales returns 20,700

Purchase returns 28,600

Gross profit % based on net selling price 34 %

Merchandise with a selling price of $29,800 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 $_____________

Explanation / Answer

Beginning Inventory = $79,100

Purchases = $286,700
Purchase Returns = $28,600
Net Purchases = Purchases - Purchase Returns
Net Purchases = $286,700 - $28,600
Net Purchases = $258,100

Cost of Goods available for sale = Beginning Inventory + Net Purchases
Cost of Goods available for sale = $79,100 + $258,100
Cost of Goods available for sale = $337,200

Sales Revenue = $418,400
Sales Returns = $20,700
Net Sales = Sales Revenue - Sales Returns
Net Sales = $418,400 - $20,700
Net Sales = $397,700

Gross Profit = Net Sales * Gross Profit %
Gross Profit = $397,700 * 34%
Gross Profit = $135,218

Cost of Goods Sold = Net Sales - Gross Profit
Cost of Goods Sold = $397,700 - $135,218
Cost of Goods Sold = $262,482

Inventory before fire = Cost of Goods available for sale - Cost of Goods Sold
Inventory before fire = $337,200 - $262,482
Inventory before fire = $74,718

Loss by Fire = Inventory before fire - Selling Price of goods damaged - Net Realizable Value
Loss by Fire = $74,718 - $29,800 - $8,900
Loss by Fire = $36,018

So, the amount of inventory fire loss is $36,018

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