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Chapter 9: 16E (page 479)

Wallace Company lost most of its inventory in a fire in December just before the year-end physical inventory was taken. The corporation鈥檚 books disclosed the following. Beginning inventory \(170,000 Sales revenue \)650,000 Purchases for the year 390,000 Sales returns 24,000 Purchase returns 30,000 Rate of gross profi t on net sales 40% Merchandise with a selling price of \(21,000 remained undamaged after the fire. Damaged merchandise with an original selling price of \)15,000 had a net realizable value of $5,300. Instructions Compute the amount of the loss as a result of the fire, assuming that the corporation had no insurance coverage.

Short Answer

Expert verified

Inventory loss due to fire is $136,500.

Step by step solution

01

Calculation of cost of goods sold

Cost of goods sold is calculated as follows:

Costofgoodssold=Salesrevenue-Salesreturns脳1-Grossprofitpercentage=$650,000-$24,000脳1-40%=$375,600

02

Calculation of cost of undamaged inventory

Cost of undamaged inventory is calculated as follows:

Costofundamagedinventory=Sellingpriceofundamagedinventory脳1-Grossprofitpercentage=$21,000脳1-40%=$12,600

03

Calculation of inventory loss by fire

Inventory loss by fire is calculated as follows:

Inventorylossbyfire=Beginninginventory+Purchases-Purchasereturn-Costofgoodssold-Undamagedinventory-Realizablevalueofdamagedinventory=$170,000+$390,000-$30,000-$375,600-$12,600-$5,300=$136,500

Thus, inventory loss by fire equals $136,500.

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Most popular questions from this chapter

You assemble the following information for Seneca Department Store, which computes its inventory under the dollar-value LIFO method. Cost Retail Inventory on January 1, 2017 \(216,000 \)300,000 Purchases 364,800 480,000 Increase in price level for year 9% Instructions Compute the cost of the inventory on December 31, 2017, assuming that the inventory at retail is (a) \(294,300 and (b) \)365,150.

Retail Inventory Method鈥擟onventional and LIFO) Leonard Company began operations late in 2016 and adopted the conventional retail inventory method. Because there was no beginning inventory for 2016 and no markdowns during 2016, the ending inventory for 2016 was \(14,000 under both the conventional retail method and the LIFO retail method. At the end of 2017, management wants to compare the results of applying the conventional and LIFO retail methods. There was no change in the price level during 2017. The following data are available for computations. Cost Retail Inventory, January 1, 2017 \)14,000 $20,000 Sales revenue 80,000 Net markups 9,000 Net markdowns 1,600 Purchases 58,800 81,000 Freight-in 7,500 Estimated theft 2,000 Instructions Compute the cost of the 2017 ending inventory under both (a) the conventional retail method and (b) the LIFO retail method

Question:The conventional retail inventory method yields results that are essentially the same as those yielded by the lower-of-cost-or-market method. Explain. Prepare an illustration of how the retail inventory method reduces inventory to market.

Ogala Corporation purchased a significant amount of raw materials inventory for a new product that it is manufacturing. Ogala uses the LCNRV rule for these raw materials. The net realizable value of the raw materials is below the original cost. Ogala uses the FIFO inventory method for these raw materials. In the last 2 years, each purchase has been at a lower price than the previous purchase, and the ending inventory quantity for each period has been higher than the beginning inventory quantity for that period. Instructions (a) At which amount should Ogala鈥檚 raw materials inventory be reported on the balance sheet? Why? (b) In general, why is the LCNRV rule used to report inventory? (c) What would have been the effect on ending inventory and cost of goods sold had Ogala used the average-cost inventory method instead of the FIFO inventory method for the raw materials? Why?

Question:What factors might call for inventory valuation at sales prices (net realizable value or market price)?

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