INTERMEDIATE ACCOUNTING(LL)-W/2 ACCESS
9th Edition
ISBN: 9781260180657
Author: SPICELAND
Publisher: MCG
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Chapter 9, Problem 9.5BE
To determine
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.
To Estimate: the cost of the inventory destroyed by the hurricane using the gross profit method.
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PROBLEM 16: On May 6, 2023, a flashflood caused damage to the merchandise stored in the
warehouse of Rome Company. You were asked to submit an estimate of the merchandise
destroyed in the warehouse. The following data were established:
A. Net sales for 2022 were P800,000 matched against cost of P560,000.
B. Merchandise inventory, January 1, 2023 was P200,000, 90% of which was in the
warehouse and 10% in the downtown showrooms.
C. For January 1, 2023 to date of flood, you ascertained that the invoice value of
purchases, all of which were stored in the warehouse, P100,000; freight inward, P4,000;
purchases retumed, P6,000.
D. Cost of merchandise transferred from the warehouse to showrooms was P8,000 and
net sales from January 1 to May 6. 2023, all of which were warehouse stock, were
P320,000.
E. There was no change in the gross profit rate adopted by the company in 2023.
21. What is the estimated merchandise destroyed by the flood?
PROBLEM 17: The following information relates to NNN ,…
Estimating Inventory Loss Using Gross Profit Method
On November 15, a fire destroyed Youngstown Inc.'s warehouse where inventory is stored. It is estimated that $12,000 can be realized from sale of usable but damaged inventory. The accounting records
concerning inventory reveal the following. Gross profit averaged 35% of net sales.
Inventory at Nov. 1
Purchases from Nov. 1 to Nov. 15
Net sales from Nov. 1 to Nov. 15
$144,000
168,000
240,000
Required
a. Calculate the estimated loss of inventory using the gross profit method. $ 144,000
b. Assume instead that the markup is 25% of cost. Estimate the loss of inventory using the gross profit method. $ 120,000
X
Knowledge Check 01
A company's warehouse was destroyed by a tornado on March 15. The only information that was salvaged
is as follows:
Inventory, January 1: $28,000
Purchases for the period 1/1 through 3/15: $15,000
Sales for the period 1/1 through 3/15: $50,000
Sales returns for the period 1/1 through 3/15: $300
Company's gross profit ratio: 20%
Using the gross profit method, the estimated cost of inventory that was destroyed is
$3,515
$9,940
O $35,000
O $3,240
Chapter 9 Solutions
INTERMEDIATE ACCOUNTING(LL)-W/2 ACCESS
Ch. 9 - Explain the (a) lower of cost or net realizable...Ch. 9 - What are the various levels of aggregation to...Ch. 9 - Describe the alternative approaches for recording...Ch. 9 - Explain the gross profit method of estimating...Ch. 9 - The Rider Company uses the gross profit method to...Ch. 9 - Explain the retail inventory method of estimating...Ch. 9 - Both the gross profit method and the retail...Ch. 9 - Define each of the following retail terms: initial...Ch. 9 - Explain how to estimate the average cost of...Ch. 9 - Prob. 9.10Q
Ch. 9 - Explain the LIFO retail inventory method.Ch. 9 - Discuss the treatment of freight-in, net markups,...Ch. 9 - Explain the difference between the retail...Ch. 9 - Prob. 9.14QCh. 9 - Prob. 9.15QCh. 9 - Explain the accounting treatment of material...Ch. 9 - It is discovered in 2018 that ending inventory in...Ch. 9 - Identify any differences between U.S. GAAP and...Ch. 9 - (Based on Appendix 9) Define purchase commitments....Ch. 9 - (Based on Appendix 9) Explain how purchase...Ch. 9 - Lower of cost or net realizable value LO91 Ross...Ch. 9 - Lower of cost or net realizable value LO91 SLR...Ch. 9 - Lower of cost or market LO91 [This is a variation...Ch. 9 - Lower of cost or market LO91 [This is a variation...Ch. 9 - Prob. 9.5BECh. 9 - Gross profit method; solving for unknown LO92...Ch. 9 - Retail inventory method; average cost LO93 Kiddie...Ch. 9 - Retail inventory method; LIFO LO93 Refer to the...Ch. 9 - Conventional retail method LO94 Refer to the...Ch. 9 - Conventional retail method LO94 Roberson...Ch. 9 - Dollar-value LIFO retail LO95 On January 1, 2018,...Ch. 9 - Dollar-value LIFO retail LO95 This exercise is a...Ch. 9 - Change i n inventory costing methods LO96 In...Ch. 9 - Change in inventory costing methods LO96 In 2018,...Ch. 9 - Inventory error LO97 In 2018, Winslow...Ch. 9 - Inventory error LO97 Refer to the situation...Ch. 9 - Lower of cost or net realizable value LO91 Herman...Ch. 9 - Lower of cost or net realizable value LO91 The...Ch. 9 - Lower of cost or net realizable value LO91 Tatum...Ch. 9 - Lower of cost or market LO91 [This is a variation...Ch. 9 - Lower of cost or market LO91 [This is a variation...Ch. 9 - Lower of cost or market LO91 [This is a variation...Ch. 9 - Prob. 9.8ECh. 9 - Prob. 9.9ECh. 9 - Prob. 9.10ECh. 9 - Gross profit method LO92 Royal Gorge Company uses...Ch. 9 - Prob. 9.12ECh. 9 - Retail inventory method; average cost LO93 San...Ch. 9 - Prob. 9.14ECh. 9 - Retail inventory method; LIFO LO93 Crosby Company...Ch. 9 - Prob. 9.16ECh. 9 - Conventional retail method; employee discounts ...Ch. 9 - Retail inventory method; solving for unknowns ...Ch. 9 - Dollar-value LIFO retail LO95 On January 1, 2018,...Ch. 9 - Prob. 9.20ECh. 9 - Dollar-value LIFO retail LO95 Lance-Hefner...Ch. 9 - Prob. 9.22ECh. 9 - Change in inventory costing methods LO96 In 2018,...Ch. 9 - Prob. 9.24ECh. 9 - Error correction; inventory error LO97 During...Ch. 9 - Prob. 9.26ECh. 9 - Inventory error LO97 In 2018, the internal...Ch. 9 - Inventory errors LO97 In 2018, the controller of...Ch. 9 - Concepts; terminology LO91 through LO97 Listed...Ch. 9 - Prob. 9.30ECh. 9 - Prob. 9.31ECh. 9 - Lower of cost or net realizable value LO91 Decker...Ch. 9 - Prob. 9.2PCh. 9 - Lower of cost or market LO91 Forester Company has...Ch. 9 - Prob. 9.4PCh. 9 - Prob. 9.5PCh. 9 - Prob. 9.6PCh. 9 - Retail inventory method; conventional and LIFO ...Ch. 9 - Prob. 9.8PCh. 9 - Prob. 9.9PCh. 9 - Dollar-value LIFO retail method LO95 [This is a...Ch. 9 - Dollar-value LIFO retail LO95 On January 1, 2018,...Ch. 9 - Retail inventory method; various applications ...Ch. 9 - Retail inventory method; various applications ...Ch. 9 - Prob. 9.14PCh. 9 - Inventory errors LO97 You have been hired as the...Ch. 9 - Inventory errors LO97 The December 31, 2018,...Ch. 9 - Integrating problem; Chapters 8 and 9; inventory...Ch. 9 - Purchase commitments Appendix In November 2018,...Ch. 9 - Judgment Case 91 Inventoriable costs; lower of...Ch. 9 - Integrating Case 93 FIFO and lower of cost or net...Ch. 9 - Prob. 9.4BYPCh. 9 - Prob. 9.5BYPCh. 9 - Prob. 9.6BYPCh. 9 - Prob. 9.7BYPCh. 9 - Real World Case 98 Various inventory issues;...Ch. 9 - Prob. 9.9BYPCh. 9 - Judgment Case 910 Inventory errors LO97 Some...Ch. 9 - Ethics Case 911 Overstatement of ending inventory ...Ch. 9 - Analysis Case 912 Purchase commitments Appendix...Ch. 9 - Continuing Cases Target Case LO93, LO94, LO95...Ch. 9 - Prob. 1CCIFRS
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- Problems Problem 1 Gross Margin Method: Inventory Burned, Indemnity. Word Wholesale Company's warehouse burned on April 1, 20X5. The following information (up to the date of the fire) was taken from the records of the company; inventory, January 1, P30,0003; gross sales, P160,000; purchases, P90,000%3; sales returns (restored to stock), P5,000; purchase returns and allowances, P2,000; and freight-in, P8,000. The cost of goods sold and gross margin for the past three years were: Cost of Goods Sold P500,000 460,000 500,000 Gross Margin P125,000 120,000 120,000 Year 20X2 20X3 20X4 Required: 1. Estimate the cost of the inventory destroyed in the fire. 2. Under what conditions would your response to (1) above be questionable? 3. The insurance company pays indemnity on market value at the date of the fire. What amount would you recommend that Word submit as an insurance claim? Explain.arrow_forwardA fire on 30 September 20X2 destroyed some of a company's inventory and its inventory records. The following information is available: $ Inventory 1 September 20X2 318,000 Sales for September 20X2 612,000 Purchases for September 20X2 412,000 Inventory in good condition at 30 September 20X2 214,000 Standard gross profit percentage on sales is 25% Based on this information, what is the value of the inventory lost? A $96,000 B $271,000 C $26,400 D $57,000arrow_forwardGross Profit Method The inventory was destroyed by fire on December 31. The following data were obtained from the accounting records: Jan. 1 Inventory $350,000 Jan. 1 - Dec. 31 Purchases (net) 2,950,000 Sales 4,440,000 Estimated gross profit rate 35% a. Estimate the cost of the inventory destroyed. Estimated Cost of Merchandise Destroyed $ $ $ $ b. Which method is used to estimate inventory cost in case of inventory destroyed by fire?arrow_forward
- Gross Profit Method The merchandise inventory was destroyed by fire on December 13. The following data were obtained from the accounting records: Jan. 1 Merchandise inventory $350,000 Jan. 1-Dec. 31 Purchases (net) 2,950,000 Sales (net) 4.440,000 Estimated gross profit rate 35% a. Estimate the cost of the merchandise destroyed. Cost of the Merchandise Destroyed $ $ b. Briefly describe the situations in which the gross profit method is useful. 1. The gross profit method is useful for estimating inventories for monthly or quarterly financial statements. 2. It is useful in estimating the cost of merchandise destroyed by fire or other disasters. 3. It is useful in reducing the carrying cost of inventory. 4. It is useful in achieving a higher net income.arrow_forwardPROBLEM 40: O00 Company uses the retail inventory method. At the end of the current year, 000 Company suffered a fire loss that destroyed most of its inventory. After the fire, only goods with a selling price of P125,000, a cost of P100,000 and a net realizable value of P75,000 was salvaged. The following information is available prior to the fire: Cost P 1,100,000 P 2,200,000 15,800,000 26.300,000 540,000 Retail Beginning inventory Purchases Freight in Purchase returns Purchase allowances Departmental transfer in Markups Cancelation of markdown 600,000 300,000 1,000,000 400,000 800,000 300,000 100,000 900,000 800,000 Departmental transfer out Markdowns 350,000 Cancelation of markup Sales Sales returns Sales discounts 50,000 24,700,000 350,000 200,000 100,000 Sales allowances Employee discounts Normal wastage 600,000 5% of sales 33. What is the estimated fire loss if o00 Company appies the conservative retail approach? 34. What is the estimated cost of goods sold if O00 Company applies…arrow_forwardExercise 9-9 (Algo) Gross profit method [LO9-2] On November 21, 2021, a fire at Hodge Company's warehouse caused severe damage to its entire inventory of Product Tex. Hodge estimates that all usable damaged goods can be sold for $27,000. The following information was available from the records of Hodge's periodic inventory system: Inventory, November 1 Net purchases from November 1, to the date of the fire Net sales from November 1, to the date of the fire $175,000 155,000 235,000 Based on recent history, Hodge's gross profit ratio on Product Tex is 40% of net sales. Required: Calculate the estimated loss on the inventory from the fire, using the gross profit method. X Answer is complete but not entirely correct. Estimated loss from fire 20,000 Xarrow_forward
- On 30 September 20X1 part of the inventory of a company was completely destroyed by fire. The following information is available: Inventory at 1 September 20X1 at cost $49,800 Purchases for September 20X1 $88,600 Sales for September 20X1 $130,000 Inventory at 30 September 20X1 – undamaged items $32,000 Standard gross profit percentage on sales 30% Based on this information, what is the cost of the inventory destroyed?arrow_forwardPROBLEM 17 On January 15, 2020, a strong monsoon hit the country and destroyed all the inventory of Aeirron Company stored in the warehouse. The following information is available from the records of the company's periodic inventory system: ww Beginning inventory Purchases, January1 to January 15, 2020 Sales, January 1 to January 15, 2020 P1,000.000 500,000 800,000 The following are the past performance of Aeirron Company: 2019 2018 Sales P4,500,000 P4,100,000 Cost of Sales 2,300,000 2,500,000 Requirements: 1. Compute the gross profit rate of the company for the pastyears. 2. Compute the inventory lost in monsoon.arrow_forwardPROBLEM 23: The records of Santiago were destroyed by fire at the end of the current year. However, certain statistical data related to the income statement are available: Interest expense P 20,000 Cost of goods sold 2,000,000 Sales discount 100,000 The beginning inventory was P400,000 and decreased 20% during the year. Administrative expenses are 25% of cost of goods sold but only 10% of gross sales. Four fifths of the operating expenses relate to sale activities. 29. Ignoring income tax, what is the net income for the current year?arrow_forward
- On 30 September 20X1 part of the inventory of a company was completely destroyed by fire. The following information is available: – Inventory at 1 September 20X1 at cost $49,800 – Purchases for September 20X1 $88,600 – Sales for September 20X1 $130,000 – Inventory at 30 September 20X1 – undamaged items $32,000 – Standard gross profit percentage on sales 30% Based on this information, what is the cost of the inventory destroyed? A $17,800 B $47,400 C $15,400 D $6,400arrow_forwardPROBLEM 40: OOO Company uses the retail inventory method. At the end of the current year, OOO Company suffered a fire loss that destroyed most of its inventory. After the fire, only goods with a selling price of P125,000, a cost of P100,000 and a net realizable value of P75,000 was salvaged. The following information is available prior to the fire: Cost Retail Beginning inventory P 1,100,000 P 2,200,000 Purchases 15,800,000 26,300,000 Freight in 540,000 Purchase returns 600,000 1,000,000 Purchase allowances 300,000 Departmental transfer in 400,000 800,000 Markups 300,000 Cancelation of markdown 100,000 Departmental transfer out 350,000 900,000 Markdowns 800,000 Cancelation of markup 50,000 Sales 24,700,000 Sales returns 350,000 Sales discounts 200,000 Sales allowances 100,000 Employee discounts 600,000 Normal wastage 5% of sales 33. What is the estimated fire loss if OOO Company applies the conservative retail approach? 34. What…arrow_forwardOn 30 September 20X1 part of the inventory of a company was completely destroyed by fire. The following information is available: – Inventory at 1 September 20X1 at cost $49,800 – Purchases for September 20X1 $88,600 – Sales for September 20X1 $130,000 – Inventory at 30 September 20X1 – undamaged items $32,000 – Standard gross profit percentage on sales 30% Based on this information, what is the cost of the inventory destroyed?arrow_forward
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