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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Gross Profit Method: Estimation of Theft Loss You are requested by a client on September 28 to prepare an insurance claim for a theft loss that occurred on that day. You immediately take an inventory and obtain the following data:

Chapter 8, Problem 10E, Gross Profit Method: Estimation of Theft Loss You are requested by a client on September 28 to

The inventory on September 28 indicates that an inventory of $15,000 remains after the theft. During the past year, net sales were made at 50% above the cost of goods sold.

Required:

  1. 1. Compute the inventory lost during the theft. Round the gross profit percentage to 3 decimal places.
  2. 2. Next Level What concerns might you have about the inventory estimation under the gross profit method?

1.

To determine

Calculate the cost of inventory lost during the theft.

Explanation

Gross Profit Method: Under this method, the beginning inventory is added to the net purchases during the period which results in the goods available for sale. Then, the estimated cost of goods sold is deducted from the goods available for sale to estimate the ending inventory.

Calculate the cost of inventory lost during the theft.

Inventory Lost During Theft
 Gross Profit method
DetailsAmount ($)Amount ($)
Beginning Inventory38,000 
Add: Purchases19,000 
Cost of Goods Available for Sale 57,000
 
Less: Estimated Cost of goods sold (34,017)
Ending Inventory Before Theft 22,983
Ending Inventory After Theft (15,000)
Inventory Lost $7,983

Table (1)

Working note 1:

Calculate the amount of cost of goods sold.

Step 1: Calculate the gross profit percentage of sales...

2.

To determine

State the concerns about the estimation of inventory under the gross profit method.

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