Question 9BE - Intermediate Accounting (Kieso)

Question

Fosbre Corporation’s April 30 inventory was destroyed by fire. January 1 inventory was \(150,000, and purchases for January through April totaled \)500,000. Sales revenue for the same period was $700,000. Fosbre’s normal gross profit percentage is 35% on sales. Using the gross profit method, estimate Fosbre’s April 30 inventory that was destroyed by fire.

Step-by-Step Solution

Answer

The inventory destroyed by fire as of April 30 equals $195,000.

The cost of goods sold is calculated as follows:

$\begin{array}{rcl}\mathrm{Cost} \mathrm{of} \mathrm{goods} \mathrm{sold}& =& \mathrm{Sales} \mathrm{revenue}-(\mathrm{Sales} \mathrm{revenue}\times \mathrm{Gross} \mathrm{profit} \mathrm{percentage})\\ & =& \$700,000-(\$700,000\times 35\%)\\ & =& \$455,000\end{array}$

Ending inventory is calculated as follows :

$\begin{array}{rcl}\mathrm{Ending} \mathrm{Inventory}& =& \mathrm{Beginning} \mathrm{Inventory}+\mathrm{Inventory} \mathrm{Purchased}-\mathrm{Costf} \mathrm{goods} \mathrm{sold}\\ & =& \$150,000+\$500,000-\$455,000\\ & =& \$195,000\end{array}$

Thus, inventory destroyed by fire equals $195,000.