Question

On September 1 of the current year, Scots Company experienced a flood that destroyed the company's entire inventory. Because the company had not completed its month end reporting for August, it must estimate the amount of inventory lost using the gross profit method. At the beginning of August, the company reported beginning inventory of $216,250. Inventory purchased during August was $192,850. Sales for the month of August were $544,100. Assuming the company's typical gross profit ratio is 40%, estimate the amount of inventory destroyed in the flood.

What is the correct answer?

Multiple Choice

• $191,460

• $81,640

• $82,640

• $135,000

• $87,640

Answer 1

Answer: Option c. $ 82,640

On September 1 of the current year, Scots Company experienced a flood that destroyed the company's entire inventory as on September 1. Means that, ending inventory of August destroyed fully.

We can calculate ending inventory of August nothing but inventory destroyed in the flood is as follow:

Amount of inventory destroyed in the flood = Cost of Goods Available for Sale - Cost of Goods Sold

= $ 4,09,100 - $ 3,26,460

= $ 82,640

Thus, Amount of inventory destroyed in the flood is $ 82,640 (Answer is option c.)

Cost of Goods Available for Sale = Cost of beginning inventory + Cost of Purchased inventory

= $ 2,16,250 + $ 1,92,850

= $ 4,09,100

Cost of Goods Sold = Sales - Gross profit

= $ 5,44,100 - $ 2,17,640

= $ 3,26,460

Gross profit = Sales * Gross profit ratio

= $ 5,44,100 * 40%

= $ 2,17,640