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

Question

Oriole 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) 79,000 Sales revenue Purchases Purchase returns $411,400 20,600 285,500 Sales returns 28,500 Gross profit based on net selling price 38 % Merchandise with a selling price of $30,600 remained undamaged after the fire, and damaged merchandise has a net realizable value of $7,500. 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 s

Explanation / Answer

Solution :- Cost of goods sold = Net Sales - Gross profit.

(Net Sales = Sales revenue - Sales returns, Accordingly, Net Sales = 411400 - 20600 = $ 390800)

Cost of goods sold = 390800 - 38 % of 390800.

= 390800 - 148504

= $ 242296.

Cost of goods available for sale = Beginning inventory + Purchases - Purchase Returns.

= 79000 + 285500 - 28500

= $ 336000.

Ending inventory value just before fire = Cost of goods available for sale - Cost of goods sold.

= 336000 - 242296 = $ 93704.

Cost of undamaged inventory = 30600 * (1 - 0.38) = $ 18972.

Value of Damaged inventory = 93704 - 18972 = $ 74732.

Inventory fire loss = 74732 - 7500 (Net realizable value of little damaged inventory)

= $ 67232.

Conclusion :- Inventory fire loss in the given question = $ 67232.

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