18E - Intermediate Accounting (Kieso)

Question

Gheorghe Moresan Lumber Company handles three principal lines of merchandise with these varying rates of gross profit on cost. Lumber 25% Millwork 30% Hardware and fittings 40% On August 18, a fire destroyed the office, lumber shed, and a considerable portion of the lumber stacked in the yard. To file a report of loss for insurance purposes, the company must know what the inventories were immediately preceding the fire. No detail or perpetual inventory records of any kind were maintained. The only pertinent information you are able to obtain are the following facts from the general ledger, which was kept in a fireproof vault and thus escaped destruction. Lumber Millwork Hardware Inventory, Jan. 1, 2017 \( 250,000 \) 90,000 $ 45,000 Purchases to Aug. 18, 2017 1,500,000 375,000 160,000 Sales revenue to Aug. 18, 2017 2,080,000 533,000 210,000 Exercises 479 480 Chapter 9 Inventories: Additional Valuation Issues Instructions Submit your estimate of the inventory amounts immediately preceding the fire.

Step-by-Step Solution

Answer

The value of inventory preceding the fire equals $196,013.40.

Calculation of gross profit on sales for Lumber

Gross profit on sales for Lumber is calculated as follows:

$\begin{array}{rcl}\mathrm{Gross} \mathrm{profit} \mathrm{percentage} \mathrm{on} \mathrm{sales}& =& \frac{\mathrm{Percentage} \mathrm{markup} \mathrm{on} \mathrm{cost}}{100\%+\mathrm{Percentage} \mathrm{markup} \mathrm{on} \mathrm{cost}}\\ & =& \frac{25\%}{100\%+25\%}\\ & =& 20\%\end{array}$

Calculation of gross profit on sales for Millwork

Gross profit on sales for Millwork is calculated as follows:

$\begin{array}{rcl}\mathrm{Gross} \mathrm{profit} \mathrm{percentage} \mathrm{on} \mathrm{sales}& =& \frac{\mathrm{Percentage} \mathrm{markup} \mathrm{on} \mathrm{cost}}{100\%+\mathrm{Percentage} \mathrm{markup} \mathrm{on} \mathrm{cost}}\\ & =& \frac{30\%}{100\%+30\%}\\ & =& 23.08\%\end{array}$

Calculation of gross profit on sales for Hardware and fittings

Gross profit on sales for hardware and fittings is calculated as follows:

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

Calculation of inventory value of principle lines

Inventory value is calculated as follows:

	Lumber	Millwork	Hardware
Inventory, Jan. 1, 2017	$250,000	$90,000	$45,000
Add: Purchases to Aug. 18, 2017	1,500,000	375,000	160,000
Cost of goods available for sale (A)	$1,750,000	$465,000	$205,000
Sales Revenue	$2,080,000	$533,000	$210,000
Gross Profit (Sales Revenue*Gross Profit Percentage)	416,000	123,016.40	59,997
Cost of goods sold (B)	$1,664,000	$409,983.60	$150,003
Ending inventory (A-B)	$86,000.00	$55,016.40	$54,997.00

Calculation of total inventory value

Total value of inventory is calculated as follows: 

$\begin{array}{rcl}\mathrm{Total} \mathrm{value} \mathrm{of} \mathrm{inventory}& =& \mathrm{Value} \mathrm{of} \mathrm{Lumber}+\mathrm{Value} \mathrm{of} \mathrm{Millwork}+\mathrm{Value} \mathrm{of} \mathrm{Hardware}\\ & =& \$86,000+\$55,016.40+\$54,997\\ & =& \$196,013.40\end{array}$

Thus, estimated value of inventory is $196,013.40.