Question

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	$	60,000
Purchases to date of storm		190,000
Sales to date of storm		250,000

The value of undamaged inventory counted was $3,600. Historically, Prentiss’s gross margin percentage has been approximately 25 percent of sales.

Required
Estimate the following:

a. Gross margin in dollars.
  

b. Cost of goods sold in dollars.

c. Ending inventory.
  

d. Amount of lost inventory.
  

Answer 1

A) CALCULATE GROSS MARGIN IN DOLLARS

GROSS MARGIN ( DOLLARS) = SALES*GROSS MARGIN RATIO

= 250,000*25%

GROSS MARGIN ( DOLLARS) = 62,500

B) CALCULATE COST OF GOODS SOLD IN DOLLARS

COST OF GOODS SOLD = SALES-GROSS MARGIN

= 250,000-62,500

COST OF GOODS SOLD = 187,500

C) CALCULATE ENDING INVENTORY

ENDING INVENTORY = BEGINNING+PURCHASE-COST OF GOODS SOLD

= 60,000+190,000-187,500

ENDING INVENTORY = 62,500

D) CALCULATE AMOUNT OF LOST INVENTORY

AMOUNT LOST INVENTORY = ENDING INVENTORY-UNDAMANGED INVENTORY

= 62,500-3,600

AMOUNT LOST INVENTORY = 58,900