Purchases from November 1,2016, to dale of flood…………… 140.000 — Hodge Company's warehouse caused severe damage its entire inventory' Product Tex estimates
Accounting & FinanceGeneralWorked Solution
On November 21, 2016, a flood at Hodge Company's warehouse caused severe damage to its entire inventory' of Product Tex. Hodge estimates that all usable damaged AICPA goods can be sold for $10,000. The following information was available from Hodge's accounting records for Adapted Product Tex:
Inventory at November 1,2016………………………………… $100,000
Purchases from November 1,2016, to dale of flood…………… 140.000
Net sales from November 1,2016, to dale of flood……………. 220,000
Based on recent history', Hodge had a gross margin (profit) on Product Tex of 30% of net sales.
Required:
1. Prepare a schedule to calculate the estimated loss on the inventory' in the flood, using the gross profit method. Show supporting computations in good form.
🔒
Unlock the complete assignment
You are viewing the free preview. Purchase this assignment once to reveal the complete resource.
$9.99 USD
Secure checkout is completed by Stripe.
2. Next Level Describe situations in which the gross profit method may not provide an accurate estimate of ending inventory.
SOLUTION
1.
HODGE COMPANY
CalculationofEstimatedLossonInventory
IntheFloodUsingGrossMargin
(Profit)MethodNovember 21,2016
Inventory at November 1, 2016.......................................................
$ 100,000
Purchases from November 1, 2016, to date of flood..................
140,000
Cost of goods available for sale..................................................... Estimated cost of goods sold: Net sales from November 1, 2016, to date of flood..............
Estimated loss on inventory in the flood........................................
$ 76,000
2.
The relevance of the gross profit method depends on the accuracy of the gross profit percentage. If the cost of purchases, productivity, sales returns and allowances, or purchase returns and allowances has changed, the company should adjust the gross profit percentage used. In addition, if the types of inventory have different markups, the company should use separate gross profit rates to each type of inventory to increase the accuracy of the estimate. Finally, if there has been a write-down of inventory or LIFO liquidation, the gross profit rate should also be adjusted.