Part 1 Gross Profit Method

Horton, Inc. suffered an inventory loss due to a flood. The following information is available to you.

Beginning inventory $100,000
Net purchase 400,000
Sales 400,000
Inventory salvaged from flood 50,000

Instructions
Use the gross profit method for estimating inventory to determine the loss due to the flood, assuming (a) gross profit is 25% of sales, and (b) gross profit is 25% of the cost of goods sold.

(a) Ending inventory = Beginning inventory + purchases - cost of goods sold
Cost of goods sold = Sales X (1- gross profit rate) = 400,000 X (1-0.25) = 300,000
Ending inventory = 100,000+400,000-300,000 = 200,000
Inventory salvaged from flood = 50,000
Loss due to flood = 200,000-50,000 = $150,000

(b) Gross profit = 25% of cost of goods sold =20% on sales (1-1/.25)
Cost of goods sold = Sales X (1- gross profit rate) = 400,000 X (1-0.20) = 320,000
Ending inventory = 100,000+400,000-320,000 = 180,000
Inventory salvaged from flood = 50,000
Loss due to flood = 180,000-50,000 = $130,000

|Part 2 Retail Inventory Method The records of Greene Company report the following data for the |
|month of April. |
| |
|Sales $204,000 Purchases (at cost) $ 96,000 |
|Sales returns 4,000 Purchases (at sales price) 176,000 |
|Additional markups 20,000 Purchase returns (at cost) 4,000 |
|Markup cancellations 3,000 Purchase returns (at sales price) 6,000 |
|Markdowns 18,600 Beginning inventory (at cost) 60,000 |
|Markdown