Reference no: EM132587216

Question 1 - On November 21, 2021, a fire at Hodge Company's warehouse caused severe damage to its entire inventory of Product Tex. Hodge estimates that all usable damaged goods can be sold for $13,000. The following information was available from the records of Hodge's periodic inventory system:

Inventory, November 1 $105,000

Net purchases from November 1, to the date of the fire 141,000

Net sales from November 1, to the date of the fire 221,000

Based on recent history, Hodge's gross profit ratio on Product Tex is 40% of net sales.

Required - Calculate the estimated loss on the inventory from the fire, using the gross profit method.

Question 2 - Goddard Company has used the FIFO method of inventory valuation since it began operations in 2018. Goddard decided to change to the average cost method for determining inventory costs at the beginning of 2021. The following schedule shows year-end inventory balances under the FIFO and average cost methods:

Year FIFO Average Cost

2018 $46,900 $57,800

2019 83,700 72,900

2020 90,600 83,700

Required -

1. Ignoring income taxes, prepare the 2021 journal entry to adjust the accounts to reflect the average cost method.

2. How much higher or lower would cost of goods sold be in the 2020 revised income statement?