17E - Intermediate Accounting (Kieso)

Question

You are called by Tim Duncan of Spurs Co. on July 16 and asked to prepare a claim for insurance as a result of a theft that took place the night before. You suggest that an inventory be taken immediately. The following data are available. Inventory, July 1 \( 38,000 Purchases—goods placed in stock July 1–15 85,000 Sales revenue—goods delivered to customers (gross) 116,000 Sales returns—goods returned to stock 4,000 Your client reports that the goods on hand on July 16 cost \)30,500, but you determine that this figure includes goods of $6,000 received on a consignment basis. Your past records show that sales are made at approximately 40% over cost. Duncan’s insurance covers only goods owned. Instructions Compute the claim against the insurance company.

Step-by-Step Solution

Answer

The insurance claim amount is $18,498.40. 

Calculation of gross profit on sales

Gross profit on sales is calculated as follows:

$\begin{array}{rcl}\mathrm{Gross} \mathrm{profit} \mathrm{percentage} \mathrm{on} \mathrm{sales}& =& \frac{\mathrm{Percentage} \mathrm{markup} \mathrm{on} \mathrm{costs}}{100\%+\mathrm{Percentage} \mathrm{markup} \mathrm{on} \mathrm{costs}}\\ & =& \frac{40\%}{100\%+40\%}\\ & =& 28.57\%\end{array}$

Calculation of cost of goods sold

Cost of goods sold is calculated as follows:

$\begin{array}{rcl}\mathrm{Cost} \mathrm{of} \mathrm{goods} \mathrm{sold}& =& \left(\mathrm{Sales} \mathrm{revenue}-\mathrm{Sales} \mathrm{returns}\right)\times \left(1-\mathrm{Gross} \mathrm{profit} \mathrm{percentage}\right)\\ & =& \left(\$116,000-\$4,000\right)\times \left(1-28.57\%\right)\\ & =& \$80,001.60\end{array}$

Calculation of goods on hand

Goods on hand is calculated as follows:

$\begin{array}{rcl}\mathrm{Goods} \mathrm{on} \mathrm{hand}& =& \mathrm{Reported} \mathrm{goods}-\mathrm{Goods} \mathrm{on} \mathrm{consignment} \mathrm{basis}\\ & =& \$30,500-\$6,000\\ & =& \$24,500\end{array}$

Calculation of claim amount

Claim amount is calculated as follows:

$\begin{array}{rcl}\mathrm{Claim} \mathrm{amount}& =& \mathrm{Inventory} \mathrm{at} \mathrm{July} 1+\mathrm{Purchases}-\mathrm{Cost} \mathrm{of} \mathrm{goods} \mathrm{sold}-\mathrm{Goods} \mathrm{on} \mathrm{hand}\\ & =& \$38,000+\$85,000-\$80,001.60-\$24,500\\ & =& \$18,498.40\end{array}$

Thus, claim amount equals $18,498.40.