Banana Corp. lost most of its inventory in a fire in December just before the ye

Question

Banana Corp. lost most of its inventory in a fire in December just before the year-end physical inventory was taken. The corporation's books disclosed the                 following.
                
                Beginning inventory $440,000
                Purchases for the year 850,000
                Purchase returns 55,000
                Sales $1,350,000

Sales Retrns $50,000

Gross Margin on sales 40%

Merchandise with a selling price of $42,000 remained undamaged after the fire. Damaged merchandise with an original selling price of $30,000 had a net realizable                 value (after the fire) of 10,600.
                
                1. Compute the amount of the loss as a result of the fire, assuming that the corporation had no insurance coverage.

2. Prepare the journal entry to record the loss and account for the damaged inventory in a separate damaged inventory account. in the same entry, record cost of goods sold for the year ended Dec 31.

3. How would the loss be classified on the income statement of Reena Corp?

4. While the gross profit percentage has average 40% over the past 5 years, it has been as high as 42% and as low as 38%. given this information, should a range of possible loss amounts be provided instead of a single figure? explain.
                

Explanation / Answer

Net Sales = 1350000 - 50000 = $1300000
Net Purchase = 850000 - 55000 = 795000

Based on net sales, cost of sales should be 1300000 x 70/100 = $910000

Opening inventory = $440000

Undamaged merchandise = 42000 x 70/100 = 29400

Damaged merchandise cost = 30000 x 70/100 = 21000, however NRV is $10600, thus it should be carried at $10500

Lost in fire = (440000 + 795000 - 29400 - 10500) - 910000 = -507515

Hope this helps!

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