Question 14Q - Intermediate Accounting (Kieso)

Question

A fire destroys all of the merchandise of Assante Company on February 10, 2017. Presented below is information compiled up to the date of the fire. Inventory, January 1, 2017 $ 400,000 Sales revenue to February 10, 2017 1,950,000 Purchases to February 10, 2017 1,140,000 Freight-in to February 10, 2017 60,000 Rate of gross profit on selling price 40% What is the approximate inventory on February 10, 2017?

Step-by-Step Solution

Answer

The inventory as of February 10, 2017, equals $430,000.

Calculation of cost of goods sold

The cost of goods sold is calculated as follows: 

$\begin{array}{rcl}\mathrm{Cost} \mathrm{of} \mathrm{Goods} \mathrm{Sold}& =& \mathrm{Sales} \mathrm{Revenue}-\left(\mathrm{Sales} \mathrm{revenue}\times \mathrm{Gross} \mathrm{profit} \mathrm{rate}\right)\\ & =& \$1,950,000-\left(1,950,000\times 40\%\right)\\ & =& \$1,170,000\end{array}$

Calculation of cost of goods available for sale

The cost of goods available for sale is calculated as follows: 

$\begin{array}{rcl}\mathrm{Cost} \mathrm{of} \mathrm{goods} \mathrm{available} \mathrm{for} \mathrm{sale}& =& \mathrm{Beginning} \mathrm{Inventory}+\mathrm{Purchases}+\mathrm{Freight}-\mathrm{in}\\ & =& \$400,000+\$1,140,000+\$60,000\\ & =& \$1,600,000\end{array}$

Calculation of inventory on February 10, 2017

The inventory on February 10, 2017, is calculated as follows: 

$\begin{array}{rcl}\mathrm{Inventory} \mathrm{on} \mathrm{February} 10, 2017 & =& \mathrm{Cost} \mathrm{of} \mathrm{goods} \mathrm{available} \mathrm{for} \mathrm{sale}-\mathrm{Cost} \mathrm{of} \mathrm{goods} \mathrm{sold}\\ & =& \$1,600,000-\$1,170,000\\ & =& \$430,000\end{array}$

Thus, the inventory on February 10, 2017, equals $430,000.