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Chapter 9: Question P9-6 (page 484)

Eastman Company lost most of its inventory in a fire in December just before the year-end physical inventory was taken. Corporate records disclose the followingInventory (beginning) \( 80,000 Sales revenue \)415,000 Purchases 290,000 Sales returns 21,000 Purchase returns 28,000 Gross profi t % based on net selling price 35%Merchandise with a selling price of \(30,000 remained undamaged after the fire, and damaged merchandise has a net realizable value of \)8,150. The company does not carry fire insurance on its inventory. Instructions Prepare a formal labeled schedule computing the fire loss incurred. (Do not use the retail inventory method.)

Short Answer

Expert verified

The fire loss incurred equals $58,250.

Step by step solution

01

Calculation of cost of undamaged goods

The cost of undamaged goods is calculated as follows:Costofundamagedgoods=UndamagedGoodsRetailValue脳1-GrossProfitPercentage=$30,000脳1-35%=$19,500

02

Calculation of fire loss on inventory

Fire loss on inventory is calculated as follows:

Inventory (beginning)

$80,000

Purchases

290,000

Purchase returns

-28,000

Goods available (at cost)

$342,000

Sales

$415,000

Sales returns

21000

Net sales

394,000

Less: Gross profit (35% of $394,000)

137,900

-256,100

Unadjusted ending inventory

$85,900

Less: Cost of undamaged goods ($30,000 x (1-35%))

19,500

Inventory damaged

$66,400

Less: Net realizable value of damaged goods

8,150

Fire Loss

$58,250

Thus, fire loss amounts to $58,250.

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