Question

Wallace Company lost most of its inventory in a fire in December just before the year-end physical inventory was taken. The corporation’s books disclosed the following. Beginning inventory \(170,000 Sales revenue \)650,000 Purchases for the year 390,000 Sales returns 24,000 Purchase returns 30,000 Rate of gross profi t on net sales 40% Merchandise with a selling price of \(21,000 remained undamaged after the fire. Damaged merchandise with an original selling price of \)15,000 had a net realizable value of $5,300. Instructions Compute the amount of the loss as a result of the fire, assuming that the corporation had no insurance coverage.

Short answer

Inventory loss due to fire is $136,500.

Step-by-step solution

Calculation of cost of goods sold

Cost of goods sold is calculated as follows:

$\begin{array}{rcl}\mathrm{Cost}\mathrm{of}\mathrm{goods}\mathrm{sold}& =& \left(\mathrm{Sales}\mathrm{revenue}-\mathrm{Sales}\mathrm{returns}\right)\times \left(1-\mathrm{Gross}\mathrm{profit}\mathrm{percentage}\right)\\ & =& \left(\$650,000-\$24,000\right)\times \left(1-40\%\right)\\ & =& \$375,600\end{array}$

Calculation of cost of undamaged inventory

Cost of undamaged inventory is calculated as follows:

$\begin{array}{rcl}\mathrm{Cost}\mathrm{of}\mathrm{undamaged}\mathrm{inventory}& =& \mathrm{Selling}\mathrm{price}\mathrm{of}\mathrm{undamaged}\mathrm{inventory}\times \left(1-\mathrm{Gross}\mathrm{profit}\mathrm{percentage}\right)\\ & =& \$21,000\times \left(1-40\%\right)\\ & =& \$12,600\\ & & \end{array}$

Calculation of inventory loss by fire

Inventory loss by fire is calculated as follows:

$\begin{array}{rcl}\mathrm{Inventory}\mathrm{loss}\mathrm{by}\mathrm{fire}& =& \left(\mathrm{Beginning}\mathrm{inventory}+\left(\mathrm{Purchases}-\mathrm{Purchase}\mathrm{return}\right)-\mathrm{Cost}\mathrm{of}\mathrm{goods}\mathrm{sold}-\mathrm{Undamaged}\mathrm{inventory}-\mathrm{Realizable}\mathrm{value}\mathrm{of}\mathrm{damaged}\mathrm{inventory}\right)\\ & =& \$170,000+\left(\$390,000-\$30,000\right)-\$375,600-\$12,600-\$5,300\\ & =& \$136,500\end{array}$

Thus, inventory loss by fire equals $136,500.