The merchandise inventory was destroyed by fire on December 13. The following data were obtained from the accounting records:
Jan. 1 Merchandise inventory $ 350,000
Jan. 1–Dec. 31 Purchases (net) 2,950,000
Sales 4,440,000
Estimated gross profit rate 35%
a. Estimate the cost of the merchandise destroyed.
b. Briefly describe the situations in which the gross profit method is useful.
Answer:
a. Merchandise inventory, January 1$ 350,000 Purchases (net), January 1–December 312,950,000 Merchandise available for sale$3,300,000 Sales, January 1–December 31 $4,440,000 Less estimated gross profit ($4,440,000 × 35%) 1,554,000 Estimated cost of merchandise sold2,886,000 Estimated merchandise inventory, December 31 $ 414,000 b. The gross profit method is useful for estimating inventories for monthly or quarterly financial statements. It is also useful in estimating the cost of merchandise destroyed by fire or other disasters.