Decision-Making Across the Organization On April 10, 2017, fire damaged the office and warehouse of Corvet Company. Most of the accounting records were destroyed, but the following account balances were determined as of March 31,2017: Inventory (January 1,2017), $80,000; Sales Revenue (January 1- March 31, 2017), $180,000; Purchases (January 1-March 31, 2017), $94,000 The company\'s fiscal year ends on December 31. It uses a periodic inventory system From an analysis of the April bank statement, you discover cancelled checks of $4,200 for cash purchases during the period April 1-10. Deposits during the same period totaled $18,500. Of that amount, 60% were collections on accounts receivable, and the balance was cash sales Correspondence with the company\'s principal suppliers revealed $12,400 of purchases on account from April 1 to April 10. Of that amount, $1,600 was for merchandise in transit on April 10 that was shipped FOB destination. Correspondence with the company\'s principal customers produced acknowledgments of credit sales totaling $37,000 from April 1 to April 10. It was estimated that $5,600 of credit sales will never be acknowledged or recovered from customers Coryst Company reached an agreement with the insurance company that its fire-loss claim should be based on the average of the gross profit rates for the preceding 2 years. The financial statements for 2015 and 2016 showed the following data. Net sales Cost of goods purchased Beginning inventory Ending inventory 2016 $600,000 404,000 60,000 80,000 2015 $480,000 356,000 40,000 60,000 Inventory with a cost of $17,000 was salvaged from the fire Instructions With the class divided into groups, answer the following. Determine the balances in (1) Sales Revenue and (2) Purchases at April 10 Determine the average gross profit rate for the years 2015 and 2016 (Hint: Find the gross profit rate for each year and divide the sum by 2.) Determine the inventory loss as a result of the fire, using the gross profit method
Solution a:
Determination of balance of sales revenue at 10.04.2017:
Sales revenue during January 1 to March 31, 2017 = $180,000
Cash sales during 1st april to 10 April 2017 = $18,500*40% = $7,400
Credit sales during 1st april to 10 April 2017 = $37,000
Balance of sales revenue at april 10 = $180,000 + $7,400 + $37,000 = $224,400
Determination of balance of Purchases at 10.04.2017:
Total purchases during January 1 to March 31, 2017 = $94,000
Cash purchases during 1st april to 10 April 2017 = $4,200
Credit purchases during 1st april to 10 April 2017 = $12,400 - $1,600 = $10,800
Balance of purchases at april 10 = $94,000 + $4,200 + $10,800 = $109,000
Solution b:
Average gross profit rate for 2015 and 2016 = (36% + 30%) / 2 = 33%
Solution c:
Sales during 2017 = $224,400
Gross profit using average gross profit method = $224,400 * 33% = $74,052
Cost of goods sold = $224,400 - $74,052 = $150,348
Total cost of goods available for sale = Begining inventory + Cost of goods purchased
= $80,000 + $109,000 = $189,000
Require ending inventory on April 10 = $189,000 - $150,348 = $38,652
Cost of inventory salvaged from fire = $17,000
Inventory loss as a result of the fire = $38,652 - $17,000 = $21,651
| Computation of Gross Profit rate - Corvet Company |
| Particulars | 2016 | 2015 |
| Sales | $600,000.00 | $480,000.00 |
| Cost of goods sold: | | |
| Beginning inventory | $60,000.00 | $40,000.00 |
| Add: Cost of goods purchased | $404,000.00 | $356,000.00 |
| Less: Ending inventory | $80,000.00 | $60,000.00 |
| Cost of goods sold | $384,000.00 | $336,000.00 |
| | |
| Gross Profit | $216,000.00 | $144,000.00 |
| | |
| Gross Profit rate | 36.00% | 30.00% |
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