On February 26 a hurricane destroyed the entire inventory stored in a warehouse

Question

On February 26 a hurricane destroyed the entire inventory stored in a warehouse owned by the Rockford Corporation. The following information is available from the records of the company’s periodic inventory system: beginning inventory, $295,000; purchases and net sales from the beginning of the year through February 26, $550,000 and $750,000, respectively; gross profit ratio, 35%.

Estimate the cost of the inventory destroyed by the hurricane using the gross profit method.

Beginning inventory                                         Plus: Net purchases Cost of goods availabel for sale Less: Cost of goods sold Net sales Less: Estimated gross profit Estimated cost of goods sold Estimated cost of inventory destroyed

Explanation / Answer

Beginning inventory              $295,000 Plus: Net purchases $550,000 Cost of goods availabel for sale $845,000 Less: Cost of goods sold Net sales $750,000 Less: Estimated gross profit ($750,000 x 35%) $262,500 Estimated cost of goods sold $487,500 Estimated cost of inventory destroyed $357,500

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