E9-17 (L04) (Gross Profit Method) You are called by Tim Duncan of Spurs Co. on J
ID: 2535523 • Letter: E
Question
E9-17 (L04) (Gross Profit Method) You are called by Tim Duncan of Spurs Co. on July 16 and asked to prepare a claim for insurance as a result of a theft that took place the night before. You suggest that an inventory be taken immediately. The follow-ing data are available. Inventory, July 1 Purchases—goods placed in stock July 1–15 $ 38,000 85,000 Sales revenue—goods delivered to customers (gross) 116,000 Sales returns—goods returned to stock 4,000 Your client reports that the goods on hand on July 16 cost $30,500, but you determine that this figure includes goods of $6,000 received on a consignment basis. Your past records show that sales are made at approximately 40% over cost. Duncan’s insur-ance covers only goods owned. Instructions Compute the claim against the insurance compan
Explanation / Answer
Opening Stock = $38,000
Purchases = $85,000
Goods Available for Sale = $38,000+$85,000
Sales (Net of Sales Return)=116,000-4,000=$112,000
Cost of Goods Sold basis Gross Profit = $112,000/1.4 = $80,000
Therefore Closing Stock = Opening STock + Purchases - Cost of Goods Sold
= $38,000+$85,000-$80,000=$43,000
The above closing stock includes goods received on consignment basis. Since the Insurance claim is only for goods owned, Value of goods and thus, the insurance amount that can be claimed = $43,000-$6000= $37,000
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