California Inc., through no fault of its own, lost an entire plant due to an earthquake on May 1, 2013. In preparing its insurance claim on the inventory loss, the company developed the following data: Inventory January 1, 2013, $300,000; sales and purchases from January 1, 2013, to May 1, 2013, $1,300,000 and $875,000, respectively. California consistently reports a 40% gross profit. The estimated inventory on May 1, 2013, is:
A)$302,500.
B)$360,000.
C)$395,000.
D)$455,000.

Question

Quizplus · Accepted Answer

To calculate the estimated inventory on May 1, 2013, we need to use the gross profit method. First, we can calculate the cost of goods sold (COGS) from January 1, 2013, to May 1, 2013:

COGS = Beginning Inventory + Purchases - Ending Inventory
COGS = $300,000 + $875,000 - Ending Inventory

We don't know the ending inventory, so we need to solve for it. We know that the sales for this period were $1,300,000, and California consistently reports a 40% gross profit. This means that COGS is 60% of sales:

COGS = 0.6 x Sales
$300,000 + $875,000 - Ending Inventory = 0.6 x $1,300,000
$1,175,000 - Ending Inventory = $780,000
Ending Inventory = $395,000

Therefore, the estimated inventory on May 1, 2013, is $395,000.