Question

On December 5, 2017, a hurricane destroyed the merchandise inventory of the Miami Muffler Company. In a waterproof floor safe were the company’s records with the following information:

Miami Muffler Company

Trial Balance

September 30, 2017

                                       Debit Credit

Cash . . . . . . . . . . . . . . . $315,325

Accounts Receivable. . . . . . . . 36,888

Inventory, December 31, 2016 . . . 129,226

Equipment. . . . . . . . . . . . . 200,775

Accumulated Depreciation . . . . . $ 32,670

Accounts Payable to Suppliers. . .    31,908

Other Current Liabilities. . . . .    2,000

Common Stock . . . . . . . . . . .    60,000

Retained Earnings. . . . . . . . .    41,482

Sales. . . . . . . . . . . . . . . 1,246,624

Sales Returns and Allowances . . . 17,900

Purchases. . . . . . . . . . . . . 546,930

Purchase Returns and Allowances. .   3,582

Sales and Administrative Expenses. 50,657

Other General Expenses . . . . . . 120,565    _______

$1,418,266   $1,418,266

  

Note: The Company’s 12 month fiscal year ends December 31st.

Through correspondence with suppliers, customers, the bank, etc. the following additional information has also been collected:

1. Correspondence with suppliers revealed unrecorded obligations at December 5^th of $120,734. These unrecorded liabilities pertained to shipments in October totaling $58,365, shipments in November of $50,635, and $10,000 for shipments in transit on December 5^th shipped FOB Destination and $1,734 for shipments in transit FOB Shipping Point.

2. Customers of the company have acknowledged indebtedness of $92,650 as of December 5^th. Based on no responses from several other customers, the company estimated that customers, who have not responded, owe approximately $9,350. Finally, based on past experience, it is estimated that 4.33% of accounts receivable will be uncollectible.

3. Bank statements and the canceled checks enclosed with the statements for October, November and through December 5^th, revealed the following:

October November December

Disbursement Activity                            

Payments on Accounts Payable

Existing at September 30th $19,650   $12,258   $   --

Payments for October

Inventory Shipments 11,650 21,460     10,695

Payments for November

Inventory Shipments     -- 25,870     4,732

Payments for December

Inventory Shipments               --        --    12,635

Deposit Activity

Received on Account

From Customers    18,125   14,330   2,224

Refund From Vendor For

Merchandise Returned on

November 30, 2014     --         -- 3,950*

*This refund was delayed until December 2, 2015 because the supplier had lost the claim submitted by Miami Muffler.

4. The insurance company is proposing a settlement of the company’s claim based on the overall gross profit for the most recent two fiscal years. Scheduled below is information obtained from prior financial statements covering 2016 and 2015:

For The Years Ended

December 31^st

                                2016 2015

Sales $671,108    $709,335

Sales Returns and Allowances 5,761    6,985

Beginning Inventory 57,569    50,345

Purchases 319,968    341,977

Purchase Returns and Allowances 1,235       916

Ending Inventory 129,226    57,569

Required

a. Determine the amount of inventory loss from the hurricane.

b. Do you think the insurance company’s approach is fair? If yes why? If not, why not?

Answer 1

Closing inventory on Dec 5, 2017 = Opening inventory on jan 1, 2017 + Purchase till Sept 30,2017 as per trial balance - Purchase returns + Unrecorded purchas till Dec 5, 2017 + Gross Profit (Sales - Purchase) -Sales = 129226 + 546930 - 3582 +120734 + (1228724 - 664082) - 1246624 + 17900 = 129226. Hence a) Inventory loss from the hurricane = 129226 b) Gross profit for 2017 = 1228724 - 664082 = 564642 ; GP for 2016 = 418271;

GP for 2015= 368513. ; Hence we can see for claim settlement purpose insurance company approach is not fair. Gross profits of 2017 is the maximum. Trial balance is already there till Sept 30TH 2017. After that the unrecorded liabilities can also be found out and the gross profit of 2017 was higher.