Part 1 Gross Profit Method Horton, Inc. suffered an inventory loss due to a floo

Question

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.

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 cancellations 5,600 Beginning inventory (at sales price) 93,000
Freight on purchases 2,000

Instructions
Compute the ending inventory by the conventional retail inventory method.

Please Show all calculations.

Explanation / Answer

                                          GP 25%              GP 25%
                                         of Sales             of COGS
Sales                                  $400,000            $400,000
Less : Gross Profit
   $400,000 x 25%              $100,000
   $400,000 x 20%                                           $80,000
Cost of goods sold              $300,000             $320,000
                        
Begnning Inventory            $100,000              $100,000
Add : Purchases                $400,000             $400,000
Goods available for sales    $500,000             $500,000
Less : COGS                      $300,000             $320,000
Estimated Ending inv.         $200,000             $180,000
Less : Salvaged Inv.             $50,000               $50,000
Estimated loss                    $150,000             $130,000

Part 2
                                           Cost                   Retail
Begining Inventory            $60,000                $93,000
Purchases                         $96,000              $176,000
Freight In                           $2,000                    -
Purchase returns                 $4,000                 $6,000
Total                           $162,000             $275,000
Add : Net MarkUps
$20,000 - $3,000                  -                       $17,000
Total                            $162,000             $292,000
Less : Net Markdown
$18,600 - $5,600                                         $13,000
Sale price of goods available                       $279,000
Less : Sales (net)
$204,000 - $4,000                                      $200,000
Ending inventory at retail                             $79,000
Cost-to-Retail ratio 162 / 292                        55.48%
        
Ending inventory at lower of cost or market
= $79,000 x 55.48%                                 $43,829

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