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Calculate the estimated loss on the inventory in the flood

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Reference no: EM132884000

Problem - Gross Profit Method: Estimation of Flood Loss - On November 21, 2019, a flood 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 $10,000. The following information was available from Hodge's accounting records for Product Tex:

Inventory at November 1, 2019 $100,000

Purchases from November 1, 2019, to date of flood 140,000

Net sales from November 1, 2019, to date of flood 220,000

Based on recent history, Hodge had a gross margin (profit) on Product Tex of 30% of net sales.

Required -

1. Prepare a schedule to calculate the estimated loss on the inventory in the flood, using the gross profit method. Show supporting computations in good form.

2. Describe situations in which the gross profit method may not provide an accurate estimate of ending inventory.

Reference no: EM132884000

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