Reference no: EM132708829

On the night of October 31st 2020, a horrible Halloween prank was played on The Booke Shoppe when pranksters set fire to the building. The warehouse and office complex were totally destroyed in a raging holocaust that firefighters battled for over three hours. In sifting through the ashes two days later, the President of The Book Shoppe, (a 95-year-old widower with no dependants), uncovered a small wooden urn which had somehow miraculously survived the total devastation brought on by the intense heat, smoke and water damage.

The contents of this urn revealed partial accounting records which contained the following information about the company's financial transactions from January 1, 2020 to October 31, 2020:

Beginning Inventory, January 1st 2020         285,000
Purchases                                            1,575,000
Purchase returns                                    (160,000)
Freight-in                                                47,500

Sales - Gross                                        2,310,500
Sales - (returns)                                   (105,500)

The President of The Booke Shoppe has heard you are studying accounting at the local college and that you are - "almost an accountant". He therefore brings the above information to you as well as the financial statements for The Booke Shoppe covering the previous five years. You are able to determine that the store's average rate of gross profit for the past five years has been 35% of net sales.

Required:

Problem 1: Prepare an estimate of the amount of inventory on hand at October 31st 2020 and hence, an estimate of the store's inventory loss for insurance purposes using the gross profit method of estimating inventory.