Howard's Supply Co. suffered a fire loss on April 20, 2009. The company's last physical inventory was taken on January 30, 2009, at which time the inventory totaled $220,000. Sales from January 30 to April 20 were $600,000 and purchases during that time were $450,000. Howard's consistently reports a 30% gross profit. The estimated inventory loss is:
A)$490,000.
B)$238,000.
C)$250,000.
D)None of these is correct.

Question

Quizplus · Accepted Answer

First, we need to calculate the cost of goods sold (COGS) during the period from January 30 to April 20:
COGS = Beginning Inventory + Purchases - Ending Inventory
Since we don't know ending inventory, we need to estimate it using the gross profit method:
Ending Inventory = COGS / (1 - Gross Profit Rate)
Gross Profit Rate = Gross Profit / Net Sales = 30% / ($600,000 - $450,000) = 50%
COGS = ($220,000 + $450,000) - Ending Inventory = $670,000 - Ending Inventory
Ending Inventory = $670,000 / (1 + 50%) = $446,667

Now we can estimate the inventory loss due to the fire:
Estimated Loss = Beginning Inventory + Purchases - Estimated Ending Inventory
Estimated Loss = $220,000 + $450,000 - $446,667 = $223,333
However, this is the cost of the inventory, not the retail value. To convert to the retail value, we need to use the gross profit rate:
Retail Value of Loss = Estimated Loss / (1 - Gross Profit Rate)
Retail Value of Loss = $223,333 / (1 - 30%) = $318,904

Therefore, the closest answer is C) $250,000.