Question

Exercise 5-14A Estimating ending inventory LO 5-4

A substantial portion of inventory owned by Prentiss Sporting Goods was recently destroyed when the roof collapsed during a rainstorm. Prentiss also lost some of its accounting records. Prentiss must estimate the loss from the storm for insurance reporting and financial statement purposes. Prentiss uses the periodic inventory system. The following accounting information was recovered from the damaged records:

Beginning inventory	$	202,900
Purchases to date of storm		398,600
Sales to date of storm		596,300

The value of undamaged inventory counted was $80,708. Historically, Prentiss’s gross margin percentage has been approximately 16 percent of sales.

Required
Estimate the following:

a. gross margin:

b. cost of goods sold

c. ending inventory

d. amount of lost inventory

Answer 1

Solution:

Requirement a. Gross Margin = Sales*16%

= $596,300 * 16% = $95,408

Requirement b. Cost of goods sold = Sales - Gross Margin

= $596,300 - $95,408 = $500,892

Requirement c. Ending Inventory = Beginning Inventory + Purchase - Cost of goods sold

= $202,900 + $398,600 - $500,892 = $100,608

Requirement d. Amount of lost inventory = Ending Inventory - Value of undamaged inventory

= $100,608 - $80,708 = $19,900

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