Groh Brothers is a large retail furniture company that operates in two adjacent warehouses. One warehouse is a showroom, and the other is used to store merchandise. On the night of June 22, 2014, a fire broke out in the storage warehouse and destroyed the merchandise stored there. Fortunately, the fire did not reach the showroom, so all the merchandise on display was saved.
Although the company maintained a perpetual inventory system, its records were rather haphazard, and the last reliable physical inventory had been taken on December
31. In addition, there was no control of the flow of goods between the showroom and the warehouse. Thus, it was impossible to tell what goods should have been in either place. As a result, the insurance company required an independent estimate of the amount of loss. The insurance company examiners were satisfied when they received the following information:
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Merchandise inventory on December 31, 2013
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$363,700.00
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Purchases, January 1 to June 22, 2014
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603,050.00
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Purchases returns, January 1 to June 22, 2014
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(2,676.50)
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Freight-in, January 1 to June 22, 2014
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13,275.00
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Sales, January 1 to June 22, 2014
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989,762.50
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Sales returns, January 1 to June 22, 2014
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(7,450.00)
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Merchandise inventory in showroom on June 22, 2014
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100,740.00
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Average gross margin
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44%
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Required:
1. Prepare a schedule that estimates the amount of the inventory lost in the fire.
2. What are some other reasons management might need to estimate the amount of inventory?