Question

On January 1, a store had inventory of $54,500. January purchases were $47,000 and January sales were $95,000. On February 1 a fire destroyed most of the inventory. The rate of gross profit was 25% of cost. Merchandise with a selling price of $5,000 remained undamaged after the fire. Compute the amount of the fire loss, assuming the store had no insurance coverage.

Fire loss

$

Answer 1

Statement of Loss From Fire

$

Inventory as on January 1 : 54,500

Add January purchases : 47,000

Total inventory available for sale : 101,500

Less cost of sales        - 76,000 See Note 1

Inventory which should be in store: 25,500

Less undamaged goods at cost : - 4,000 See Note 2

The amount of the fire loss : $21,500

Note 1: Cost of sales ; Sales are $95,000 and gross profit margin is 25%.

Therefore the cost of sales = Sales / 1+0.25

= 95000 / 1.25 = $76,000

Verification: Cost of sales ; $76,000

Add Gross profit @ 25% $19,000

Sales amount $95,000

Note 2: The merchandise remaining undamaged at selling price = $5000

Therefore, the cost of undamaged Merchandise  = 5000 / 1.25 = $4,000

Verification: Cost of undamaged Merchandise:   $4,000

Add Gross profit @ 25% :       $1,000

Selling price :    $5,000