On October 31, a flood at Payne Company's only warehouse caused severe damage to its entire inventory. Based on recent history, Payne has a gross profit of 25 percent of net sales. The following information is available from Payne's records for the ten months ended October 31:

A physical inventory disclosed usable damaged goods which Payne estimates can be sold for $70,000. Using the gross profit method, the estimated cost of goods sold for the ten months ended October 31 should be

Question

On October 31, a flood at Payne Company's only warehouse caused severe damage to its entire inventory. Based on recent history, Payne has a gross profit of 25 percent of net sales. The following information is available from Payne's records for the ten months ended October 31:

A physical inventory disclosed usable damaged goods which Payne estimates can be sold for $70,000. Using the gross profit method, the estimated cost of goods sold for the ten months ended October 31 should be

Quizplus · Accepted Answer

Using the gross profit method, the formula to calculate estimated cost of goods sold is:
Estimated Cost of Goods Sold = Net Sales x (100% - Gross Profit Rate)

From the given information, we can calculate the following:
Net Sales for 10 months = $4,200,000 - $420,000 = $3,780,000
Gross Profit Rate = 25%
Usable Damaged Goods Value = $70,000

Now we can calculate as follows:
Estimated Cost of Goods Sold = $3,780,000 x (100% - 25%) = $2,835,000
Adjustment for usable damaged goods = ($2,835,000 / $3,700,000) x $70,000 = $5,405
Estimated Cost of Goods Sold after adjustment = $2,835,000 - $5,405 = $2,829,595

Therefore, the estimated cost of goods sold for the ten months ending October 31 should be $2,829,595. However, since the question asks for the estimated cost of goods sold for the entire ten months, not just for the first ten months, we need to extrapolate the figure for the last two months. Assuming similar sales and gross profit rate for the last two months, we can estimate the cost of goods sold for the entire ten months to be:
$2,829,595 / 10 x 12 = $3,395,514. Adding the $70,000 for the usable damaged goods gives us a total of $3,465,514.
Therefore, the answer is C) $3,900,000 (rounded to the nearest thousand).

On October 31, a Flood at Payne Company's Only Warehouse