Question P9-6 - Intermediate Accounting (Kieso)

Question

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.)

Step-by-Step Solution

Answer

The fire loss incurred equals $58,250.

Calculation of cost of undamaged goods

The cost of undamaged goods is calculated as follows: $$\begin{gathered} \mathrm{Cost} \mathrm{of} \mathrm{undamaged} \mathrm{goods}=\mathrm{Undamaged} \mathrm{Goods} \mathrm{Retail} \mathrm{Value}\times \left(1-\mathrm{Gross} \mathrm{Profit} \mathrm{Percentage}\right) \\ =\$30,000\times \left(1-35\%\right) \\ =\$19,500 \end{gathered}$$

 

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.