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.

Short answer

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

Step-by-step solution

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.