Mary Potts arrived at her stored on the morning of January 29, she found empty shelves and display racks; thieves had broken in during the night and stolen the entire inventory. Accounting record showed that Potts had inventory costing $50,000 on January 1. From January 1 to January 29, Potts had made net sales of $70,000 and net purchase of $80,000. The gross profit during the past several years had consistently averaged 42 percent of net sales. Potts plan to file an insurance claim for the theft loss.a. Using gross profit method, estimate the cost of inventory at the time of the theftb. Does Potts use the periodic inventory method or does she account for inventory using the perpetual method? Please could defend your answer.

Question
Asked Jul 19, 2019
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Mary Potts arrived at her stored on the morning of January 29, she found empty shelves and display racks; thieves had broken in during the night and stolen the entire inventory. Accounting record showed that Potts had inventory costing $50,000 on January 1. From January 1 to January 29, Potts had made net sales of $70,000 and net purchase of $80,000. The gross profit during the past several years had consistently averaged 42 percent of net sales. Potts plan to file an insurance claim for the theft loss.

a. Using gross profit method, estimate the cost of inventory at the time of the theft

b. Does Potts use the periodic inventory method or does she account for inventory using the perpetual method? Please could defend your answer.

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Expert Answer

Step 1

The perpetual inventory method and periodic inventory method are the methods used to count the quantity of ending inventory. In perpetual inventory method a proper record of inventory is maintained. In periodic inventory method, the system is relied upon physical count of inventory.

Step 2

a. Given:

Beginning inventory= $50,000

Net sales during the period= $70,000

Net purchases during the period= $80,000

Gross profit= 42% of net sales

To calculate the cost of goods sold (COGS):

COGS = Net sales – Gross profit

            = $70,000 – (42% of 70,000)

            = $70,000 - $29,400

            = $40,600

To calculate the cost of inventory at the time of theft:

Cost of inventory at the time of theft = Beginning inventory + Net purchases – Cost of goods                 sold

                                                            = $50,000 + $80,000 - $40,600

                                                            = $89,400

Step 3

b. The perpetual inventory method maintains the records of inventory up to date. The person calculates the cost of inventory lost by theft, using the gross profit method.

So, it...

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Inventory costing

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