On March 15, a fire destroyed Interlock Company's entire retail inventory. The inventory on hand as of January 1 totaled $4,950,000. From January 1 through the time of the fire, the company made purchases of $2,049,000, incurred freight-in of $234,000, and had sales of $3,630,000. Assuming the rate of gross profit to selling price is 30%, what is the approximate value of the inventory that was destroyed?
A) $6,144,000.
B) $4,458,000.
C) $4,692,000.
D) $7,233,000.

Question

Quizplus · Accepted Answer

To calculate the cost of goods sold (COGS) we need to take the beginning inventory and add purchases and freight-in, then subtract ending inventory. Since all inventory was destroyed, we have zero ending inventory.

Beginning inventory + purchases + freight-in - ending inventory = COGS
$4,950,000+$2,049,000+$234,000-0=$7,233,000

If we know the COGS, we can use the gross profit rate to calculate the sales revenue.

COGS/sales revenue = (100% - gross profit rate)

$7,233,000/sales revenue = 70%
sales revenue = $7,233,000/70% = $10,332,857.14

Finally, we can use the gross profit rate to find the approximate value of the destroyed inventory.

Sales revenue - cost of goods sold = gross profit
$10,332,857.14 - $7,233,000 = $3,099,857.14

Gross profit/gross profit rate = inventory cost
$3,099,857.14/30% = $10,332,857.14

However, this is the cost of the inventory, not the selling price. To find the selling price, we need to add the gross profit back to the cost.

Inventory cost + gross profit = selling price
$10,332,857.14 + $3,099,857.14 = $13,432,714.28

Therefore, the approximate value of the inventory that was destroyed is $4,950,000 (beginning inventory) + $2,049,000 (purchases) + $234,000 (freight-in) - $13,432,714.28 (selling price) = $4,692,285.72, which is closest to answer choice C.

On March 15, a Fire Destroyed Interlock Company's Entire Retail