Question

# Gross profit method

Zidek Corp. repuires an estimate of the cost of goods lost y fire on March 9. Merchandise on hand on January 1 was 38,000. Purchases since January 1 were 92.000; freight-in, 3,400; purchase returns and allowances, 2400. Sales are made at 33 1/3% above cost and totaled 120,000 to March 9. Goods costing 10,900 were left undamaged by the fire; remaining goods were destroyed.

(a) Compute the cost of goods destroyed
(b) Compute the cost of goods destroyed, assuming that the gross profit is 33 1/3 of sales.

 a. Merchandise on hand, January 1 \$38.000 Purchases \$92.000 Less: Purchase returns and allowances \$2.400 Freight-in \$3.400 Total merchandise available (at cost) \$131.000 Cost of goods sold \$90.000 Ending inventory \$41.000 Less: Undamaged goods \$10.900 Estimated fire loss \$30.100 Gross profit 25% of sales Cost of goods sold \$90.000 b. Cost of goods sold \$79.992 Total merchandise available (at cost) \$51.008 Less: Undamaged goods \$10.900 Estimated fire loss \$40.108

SOLUTION :

a.

Stock available before fire (ending inventory (in dollars)

= (Opening stock + Purchases - Returns  and allowances + Freight-in) - COGS

= (38000 + 92000 - 2400 + 3400) - Sales / ( 1 + 1/3)   (since sales are 33 1/3 % added to the COGS)

= 131000 - 120000 * 3/4

= 131000 - 90000

= 41000 (\$)

Undamaged goods = 10900 (\$)

Goods damaged in fire = 41000 - 10900 = 30100 (\$) ( NSWER)

b.

CP = sales * 33 1/3 % = 120000 * 1/3 = 40000 (\$)

=> COGS = Sales - GP = 120000 - 40000 = 80000

Goods available before fire

= 131000 - 80000

= 51000 (\$)

Goods damaged în fire

= goods before fire - goods undamaged after fire

= 51000 - 10900

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