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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 Fire Loss On January 20, 2020, Stewart Company’s records revealed the following information:

Chapter 8, Problem 4P, Gross Profit Method: Estimation of Fire Loss On January 20, 2020, Stewart Companys records revealed

A fire destroyed the entire inventory on January 20, 2020, except for purchases in transit, FOB shipping point of $6,000, and goods having a selling price of $4,700 that were salvaged from the fire. The salvaged goods had an estimated salvage value of $2,900. The average gross profit on net sales in previous periods was 40%.

Required:

  1. 1. Compute the cost of the inventory lost in the fire.
  2. 2. Next Level If a company discloses that it uses a periodic inventory system, what concerns might you have about its interim financial statements?

1.

To determine

Calculate the cost of the inventory lost in the fire.

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 the inventory lost in the fire.

Inventory Lost in the Fire
 Gross Profit method
DetailsAmount ($)Amount ($)
Beginning Inventory 55,300
Add: Purchases 376,100
Less: Purchases returns(10,400) 
         Purchases discount taken(6,800)(17,200)
Freight-in 3,500
Cost of Goods Available for Sale 417,700
 
Sales 592,000
Less: Sales returns (6,600)
Net sales 585,400
 
Inventory lost in the fire:  
Cost of Goods Available for Sale 417,700
Less: Cost of goods sold (351,240)
         Cost of goods salvaged (2,820)
Inventory Lost $63,640

Table (1)

Working note 1:

Calculate the amount of purchases.

Purchases =(Amount of purchasesPurchases in transit)=($382,100$6,000)=$376,100

Working note 2:

Calculate the amount of cost of goods sold

2.

To determine

Explain the concern about its interim financial statements.

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