A fire destroyed the Churchill Company\'s warehouse on March 15, 2014. Only good
ID: 2504798 • Letter: A
Question
A fire destroyed the Churchill Company's warehouse on March 15, 2014. Only goods with a normal selling price of $12,500 and a net realizable value of $5,000 were saved. The following information is available from the company's records:
Inventory in warehouse, 1/1/14
$250,000
Purchases, 1/1/14-3/15/14
620,000
Purchase returns
9,500
Freight-in
14,000
Sales, 1/1/13-3/15/14
850,000
Sales returns
20,000
For the period from 2009 through 2013, Churchill had a gross profit of $2,100,000 on net sales of $6,000,000.
Required:
Estimate Churchill
Inventory in warehouse, 1/1/14
$250,000
Purchases, 1/1/14-3/15/14
620,000
Purchase returns
9,500
Freight-in
14,000
Sales, 1/1/13-3/15/14
850,000
Sales returns
20,000
Explanation / Answer
Gross Profit=2,100,000/6,000,000=35%
Ending Inventory = Beginning Inventory + (Purchases - Purchase Returns) + Freight-In - (Sales - Sales Returns)*(1-Gross Profit) = 250,000+(620,000-9500)+14,000-(850,000-20,000) = $ 335,000
Net realizable value = $5,000
Net loss =335,000-5,000 = $ 330,000
Sales * (1-Gross Profit) is used to determine COGS
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