Purpose: This exercise will illustrate the use of the gross profit method of inventory estimation when: (1) gross profit is expressed as a percentage of cost, and (2) gross profit is expressed as a percentage of selling price.
Tim McInnes requires an estimate of the cost of goods lost by fire on April 2. Merchandise on hand on January 1 was $38,000. Purchases since January 1 were $72,000; freight-in, $3,400; and purchase returns and allowances, $2,400. Sales totaled $100,000 to April 2. Goods costing
$7,700 were left undamaged by the fire; all other goods were destroyed.
Instructions
(a) Compute the cost of goods destroyed, assuming that the gross profit is 25% of cost.
(b) Compute the cost of goods destroyed, assuming that the gross profit is 25% of sales.