The merchandise inventory was destroyed by fire on December 13. The following data were obtained from the accounting records

The merchandise inventory was destroyed by fire on December 13. The following data
were obtained from the accounting records:


Jan. 1 Merchandise inventory $ 350,000
Jan. 1–Dec. 13 Purchases (net) 2,950,000
Sales (net) 4,440,000
Estimated gross profit rate 35%




a. Estimate the cost of the merchandise destroyed.

b. Briefly describe the situations in which the gross profit method is useful.

Answer:


a. Merchandise inventory, January 1 $ 350,000
Purchases (net), January 1–December 31 2,950,000
Merchandise available for sale $3,300,000
Sales (net), January 1–December 31 $4,440,000
Less estimated gross profit ($4,440,000 × 35%) 1,554,000
Estimated cost of merchandise sold 2,886,000
Estimated merchandise inventory, December 31 $ 414,000


b. The gross profit method is useful for estimating inventories for monthly or quarterly financial statements. It is also useful in estimating the cost of merchandise destroyed by fire or other disasters.