Question

On November 21, 2016, a flood at Hodge Company's warehouse caused severe damage to its entire inventory of Product Tex. Hodge estimates that all usable damaged goods can be sold for $11,100. The following information was available from Hodge's accounting records for Product Tex: Inventory at November 1, 2016 $97,000 Purchases from November 1, 2016, to date of flood 147,000 Net sales from November 1, 2016, to date of flood 220,000 Based on recent history, Hodge had a gross margin (profit) on Product Tex of 30% of net sales. Required:

. Prepare a schedule to calculate the estimated loss on the inventory in the flood, using the gross profit method.

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estimate of cost of goods sold
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Blank labels include:

• Accounts payable
• Add: Estimated gross margin (profit)
• Add: Salvage goods
• Cash
• Estimated cost of goods sold
• Estimated cost of inventory at date of flood
• Estimated loss on inventory in the flood
• Inventory at November 1, 2016
• Less: Estimated gross margin (profit)
• Less: Salvage goods
• Net sales from November 1, 2016, to date of flood
• Purchases from November 1, 2016, to date of flood
• Cost of goods available for sale

2. The gross profit method may not provide an accurate estimate of ending inventory when:

Answer 1

2)The gross profit method may not provide an accurate estimate of ending inventory when we are using historic gross percentage and if that value is not accurate then the value we obtain for ending inventory is not accurate