Reference no: EM133118572
Question - Gross Profit Method: Estimation of Flood Loss - On November 21, 2016, 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 $8,500. The following information was available from Hodge's accounting records for Product Tex:
Inventory at November 1, 2016 $113,000
Purchases from November 1, 2016, to date of flood 149,000
Net sales from November 1, 2016, to date of flood 233,000
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.
2. The gross profit method may not provide an accurate estimate of ending inventory when: A LIFO liquidation has occurred. All of the choices may result in inaccurate estimates of ending inventory when using the gross profit method. Different types of inventory have different markups. Sales returns and allowances have changed from prior years.
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