Question

Underwater, Inc. had a flood in its plant that destroyed most of its inventory. Its records show that beginning inventory was $20,000. Underwater made purchases of $250,000 and sales of $300,000 during the year. Its normal gross profit percentage is 35%. It can sell some of its damaged inventory for $7,500. The insurance company will reimburse Underwater for 75% of its loss. What amount should Underwater report as loss from the flood?

Answer 1

$ 16,875

Step-by-step explanation:

Beginning Inventory $ 20,000

Purchases $ 250,000

Sales $ 300,000

Gross Profit: 35%

Inventory before flood determination:

Cost of Sales ( 100% - 35% ) x Sales

= ( 1 - 0.35 ) x 300.000 ---> Cost of Sales

= 195,000

Sales 300,000.00 100%

Cost 195,000.00 65%

Gross Profit: 105,000.00 35%

Beginning Inventory $ 20,000

Purchases $ 250,000

Sales -$ 195,000

Inventory before flood: $ 75,000

Inventory before flood: $ 75,000

Inventory damaged sold: $ -7,500

Net Loss: $ 67,500

Insurance Reimbursement: $ 50,625.00 ( 67,500 x 75% )

Net Loss from flood: $ 16,875 ( 67,500 - 50,625 )