Eastman Company lost most of its inventory in a fire in December just before the

Question

Eastman 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.

Merchandise with a selling price of $35,900 remained undamaged after the fire, and damaged merchandise has a net realizable value of $8,730. 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 (beginning) $ 87,500 Sales revenue $426,800 Purchases 324,000 Sales returns 22,400 Purchase returns 36,100 Gross profit % based on net selling price 33 %

Explanation / Answer

Calculation of Inventory available:

Calculation of Cost of Goods sold: Net Sales(Sales - Return) = $404,400

Gross Profit = 404,400 x 33% = $133,452

Cost = 404,400 - 133,452 = $270,948

Calculation of Cost of undamaged Merchandise = $35,900 x 33% = 11,847

Cost: 35,900 - 11,847 = $24,053

Calculation of Loss by Fire:

Amount($) Beginning Inventory 87,500 Add: Net Purchases(Purchase - Return) 287,900 Less: Cost of Goods sold 270,948 Closing Inventory 104,452

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