A fire destroyed the warehouse of Reed Enterprises, on August 31, 2017. The books and records of Reed showed the following information on that date. $$\begin{array} { | l | r | }
\hline \text { Merchandise Inventory. Jan. 1, 2017 } & \$ 540,000 \
\hline \text { Purchases to date } & 950,000 \
\hline \text { Freight - In } & 40,000 \
\hline \text { Sales to date } & \$ 2,300,000 \
\hline
\end{array}$$
The gross profit ratio has averaged 60 % of sales for the past six years.
Required:
Use the gross profit method to estimate the cost of inventory destroyed by fire.
A) $610,000
B) $1,530,000
C) $920,000
D) $1,490,000

Question

A fire destroyed the warehouse of Reed Enterprises, on August 31, 2017. The books and records of Reed showed the following information on that date. $$\begin{array} { | l | r | } 
\hline \text { Merchandise Inventory. Jan. 1, 2017 } & \$ 540,000 \
\hline \text { Purchases to date } & 950,000 \
\hline \text { Freight - In } & 40,000 \
\hline \text { Sales to date } & \$ 2,300,000 \
\hline
\end{array}$$ 
The gross profit ratio has averaged 60 % of sales for the past six years.
Required:
Use the gross profit method to estimate the cost of inventory destroyed by fire.
A) $610,000
B) $1,530,000
C) $920,000
D) $1,490,000

Quizplus · Accepted Answer

The gross profit method estimates the cost of inventory destroyed by fire by using the gross profit ratio. The gross profit ratio is the percentage of sales that represents gross profit. In this case, the gross profit ratio is 60%.To estimate the cost of inventory destroyed by fire, we can use the following formula:Cost of inventory destroyed by fire = Sales to date x Gross profit ratioCost of inventory destroyed by fire = $2,300,000 x 60%Cost of inventory destroyed by fire = $1,380,000Therefore, the cost of inventory destroyed by fire is $1,380,000.

A Fire Destroyed the Warehouse of Reed Enterprises, on August