Howard's Supply Co.suffered a fire loss on April 20,2016.The company's last physical inventory was taken January 30,2016,at which time the inventory totaled $220,000.Sales from January 30 to April 20 were $600,000 and purchases during that time were $450,000.Howard's consistently reports a 30% gross profit.The estimated inventory loss is:
A)$490,000.
B)$238,000.
C)$250,000.
D)None of these answer choices are correct.

Question

Quizplus · Accepted Answer

To calculate the estimated inventory loss, we need to first calculate the cost of goods sold (COGS):
COGS = Beginning Inventory + Purchases - Ending Inventory
COGS = $220,000 + $450,000 - Ending Inventory
We don't know the ending inventory, so we need to estimate it using the Gross Profit Method.
Gross Profit = Sales - COGS
Gross Profit = $600,000 - Gross Profit x 70% (30% is the complement of gross profit)
Gross Profit = $600,000 - 0.7Gross Profit
Gross Profit = $600,000 / 1.7
Gross Profit = $352,941.18
COGS = $600,000 - $352,941.18
COGS = $247,058.82

Now we can estimate the ending inventory:
Ending Inventory = Beginning Inventory + Purchases - COGS
Ending Inventory = $220,000 + $450,000 - $247,058.82
Ending Inventory = $422,941.18

The inventory loss is the difference between the estimated ending inventory and the actual ending inventory after the fire. We don't have that information, so we cannot calculate the exact inventory loss. However, the estimated inventory loss is:

Estimated Inventory Loss = Estimated Ending Inventory - Beginning Inventory
Estimated Inventory Loss = $422,941.18 - $220,000
Estimated Inventory Loss = $202,941.18

Therefore, the closest answer choice is C) $250,000.