FLC Insurance Company Computation Project

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Xunat2017

Business Finance

Folsom Lake College

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Hello, Could someone help me solve question#5 here. Thank you!

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a. Determine the amount of inventory loss from the hurricane.

b. Do you feel the insurance company’s approach is fair? Explain in detail with supporting calculations.

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Question #5 On December 5, 2019, a hurricane destroyed the merchandise inventory of the Key West Music Company. In a waterproof secure safe were the company’s records with the following information: Key West Music Company Trial Balance September 30, 2019 Debit Credit Cash . . . . . . . . . . . . . . . $315,325 Accounts Receivable. . . . . . . . 36,888 Inventory, December 31, 2018 . . . 129,226 Equipment. . . . . . . . . . . . . 200,775 Accumulated Depreciation . . . . . $ 32,670 Accounts Payable to Suppliers. . . 31,908 Other Current Liabilities. . . . . 2,000 Common Stock . . . . . . . . . . . 60,000 Retained Earnings. . . . . . . . . 41,482 Sales. . . . . . . . . . . . . . . 1,246,624 Sales Returns and Allowances . . . 17,900 Purchases. . . . . . . . . . . . . 546,930 Purchase Returns and Allowances. . 3,582 Sales and Administrative Expenses. 50,657 Other General Expenses . . . . . . 120,565 _______ $1,418,266 $1,418,266 Note: The Company’s 12 month fiscal year ends December 31st. Through correspondence with suppliers, customers, the bank, etc. the following additional information has also been collected: 1. Correspondence with suppliers revealed unrecorded obligations at December 5th of $120,734. These unrecorded liabilities pertained to shipments in October totaling $58,365, shipments in November of $50,635, and $10,000 for shipments still in transit on December 5th shipped FOB Destination, and also $1,734 for shipments still in transit FOB Shipping Point. 2. Customers of the company have acknowledged indebtedness of $94,950 as of December 5th. Based on no responses from several other customers, the company estimated that customers, who have not responded, owe approximately $12,650. Finally, based on past experience, it is estimated that 2.25% of accounts receivable will be uncollectible. 3. Bank statements and the canceled checks enclosed with the statements for October, November and through December 5th, revealed the following: October November December Disbursement Activity Payments on Accounts Payable Existing at September 30th $19,650 $12,258 $ -Payments for October Inventory Shipments Payments for November Inventory Shipments Payments for December Inventory Shipments Deposit Activity Received on Account From Customers 11,650 --- 18,125 21,460 10,695 25,870 4,732 -- 14,330 12,635 2,224 Refund from Vendor For Merchandise Returned on August 31, 2019 --3,950* *This refund was delayed until December 2, 2019 because the supplier had lost the claim submitted by Key West Music Company. 4. The insurance company is proposing a settlement of the company’s claim based on the overall gross profit for the most recent two fiscal years. Scheduled below is information obtained from prior financial statements covering 2018 and 2017: For The Years Ended December 31st 2018 2017 Sales $671,108 $709,335 Sales Returns and Allowances 5,761 6,985 Beginning Inventory 57,569 50,345 Purchases 319,968 341,977 Purchase Returns and Allowances 1,235 916 Ending Inventory 129,226 57,569 Required a. Determine the amount of inventory loss from the hurricane. b. Do you feel the insurance company’s approach is fair? Explain in detail with supporting calculations. STANISLAW CORPORATION Computation of Inventory Fire Loss April 15, 2018 Inventory, 1/1/18 .......................................... Purchases, 1/1/ – 3/31/18............................. April merchandise shipments paid ............ Unrecorded purchases on account ............ Total ................................................... Less: Shipments in transit ......................... Merchandise returned ..................... Merchandise available for sale ................... Less estimated cost of sales: Sales revenue, 1/1/ – 3/31/18 ............ Sales revenue, 4/1/ – 4/15/18 Receivables acknowledged at 4/15/15 ................................... Estimated receivables not acknowledged .......................... Total ............................................. Add collections, 4/1/ – 4/15/15 ($12,950 – $950).............................. Total ............................................. Less receivables, 3/31/18 ................. Total sales 1/1/ – 4/15/18 ............. Less gross profit (45%* X $161,000) ......... Estimated merchandise inventory on hand at the time of the fire .......................... Less: Sale of salvaged inventory .............. Net Amount of Inventory Lost in Fire ......... Important: you must subtract $3,500 received from the sale of salvaged inventory. Therefore, the loss after the $3,500 received for salvaged inventory sold, is the net loss of $50,700. *See the following page for the gross profit calculation and an expanded analysis as to whether the insurance company’s approach is fair. $ 75,000 52,000 3,400 15,600 146,000 $ 2,300 950 3,250 142,750 135,000 $46,000 8,000 54,000 12,000 66,000 40,000 26,000 161,000 72,450 88,550 54,200 3,500 $ 50,700 Computation of Gross Profit Rate by Insurance Company Net sales, 2016............................................... Net sales, 2017............................................... Total net sales ..................................... Beginning inventory ...................................... Net purchases, 2016 ...................................... Net purchases, 2017 ...................................... Total ..................................................... Less: Ending inventory ................................ Gross profit ........................................ $390,000 530,000 920,000 $ 66,000 235,000 280,000 581,000 75,000 506,000 $414,000 Gross profit rate ($414,000 ÷ $920,000) ...... Important Question: Is the Insurance Company’s Approach Fair? Gross Profit Analysis Broken Down by Each Year Beginning Inventory + Purchases = Total Available - Ending Inventory = Cost of Goods Sold 2016 $ 66,000 235,000 301,000 ( 50,000) $251,000 2017 $ 50,000 280,000 330,000 ( 75,000) $255,000 Net Sales Less Cost of Goods Sold Gross Profit and GP% $390,000 $530,000 (251,000) (255,000) $139,000 35.64% $275,000 51.89% Notice: the significant improvement in the gross profit percentage during 2017. In addition, notice the significant increase in sales. The 2017 year ended just a few months before the fire on April 15, 2018, therefore, the most relevant gross profit percentage to use for the fire loss calculation should be the 51.89% calculated above for 2017, as opposed to averaging the two years as the insurance company has done. Calculation of Inventory Loss Based on 2017 Gross Profit Rate of 51.59% Sales 1/1/ - 4/15 (from prior page) $161,000 Inventory Available (from prior page) $142,750 Less 2017 GP 51.89% x $161,000 ( 83,543) Less Cost of Goods Sold 1/1/ - 4/15 ( 77,457) Cost of Goods Sold 1/1/ - 4/15 $ 77,457 Inventory on Hand at Time of Fire $ 65,293 Less Sale of Salvaged Inventory ( 3,500) Inventory Loss $ 61,793 Conclusion: Insurance company’s approach of using a two-year average gross profit rate, undervalues the estimated loss by $11,093 ($61,793 using 2017 vs. $50,700 as determined on the previous page using a two year overall average gross profit rate of 45%). 45% Chapter 9 Quiz Due Date: Tuesday, November 16th • Compute the amount of inventory fire loss STANISLAW CORPORATION Inventory Fire Loss Computation April 15, 2018 Inventory, January 1, 2018 $ 75,000 Purchases from January 1 to March 31,2018 52,000 April merchandise shipments paid 3,400 Purchases on account-Unrecorded at April 15,2018 15,600 Total $ 146,000 Less: Merchandise in transit on April 15 $ 2,300 Merchandise returned 950 Merchandise available for sale 3,250 $ 142,750 Less: Estimated cost of sales: Sales revenue during January 1 to March 31,2018 135,000 Sales revenue, April 1 to April 15, 2018 Receivables acknowledged at 4/15/2018 Receivables not acknowledged Total $ 46,000 8,000 54,000 Add: Collections, April 1 to April 15, 2018 ($12,950 - $950) Total Less: Receivables March 31, 2018 Total Sales January 1 to April 15 Less: Gross Profit ($161,000 x 45%) Estimated merchandise inventory Less: Sales value of salvaged inventory Inventory Fire Loss 12,000 66,000 40,000 26,000 161,000 72,450 88,550 54,200 3,500 $ 50,700 • Computation of Gross Profit Ratio Net sales in 2016 $ 390,000 Net sales in 2017 530,000 Total net sales 920,000 Beginning inventory $ 66,000 Net purchases, 2016 235,000 Net purchases, 2017 280,000 Total Less: Ending Inventory Gross Profit Gross Profit ratio ($414,000: 920,000 x 100) Thy Mai ACCT 103 581,000 75,000 506,000 $414,000 45%
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Question #5
On December 5, 2019, a hurricane destroyed the merchandise inventory of the Key West Music
Company. In a waterproof secure safe were the company’s records with the following
information:
Key West Music Company
Trial Balance
September 30, 2019
Debit
Credit
Cash . . . . . . . . . . . . . . . $315,325
Accounts Receivable. . . . . . . . 36,888
Inventory, December 31, 2018 . . . 129,226
Equipment. . . . . . . . . . . . . 200,775
Accumulated Depreciation . . . . .
$ 32,670
Accounts Payable to Suppliers. . .
31,908
Other Current Liabilities. . . . .
2,000
Common Stock . . . . . . . . . . .
60,000
Retained Earnings. . . . . . . . .
41,482
Sales. . . . . . . . . . . . . . .
1,246,624
Sales Returns and Allowances . . . 17,900
Purchases. . . . . . . . . . . . . 546,930
Purchase Returns and Allowances. .
3,582
Sales and Administrative Expenses. 50,657
Other General Expenses . . . . . . 120,565
_______
$1,418,266 $1,418,266
Note: The Company’s 12 month fiscal year ends December 31st.
Through correspondence with suppliers, customers, the bank, etc. the following additional
information has also been collected:
1. Correspondence with suppliers revealed unrecorded obligations at December 5th of
$120,734. These unrecorded liabilities pertained to shipments in October totaling $58,365,
shipments in November of $50,635, and $10,000 for shipments still in transit on December 5th
shipped FOB Destination, and also $1,734 for shipments still in transit FOB Shipping Point.
2. Customers of the company have acknowledged indebtedness of $94,950 as of December
5th. Based on no responses from several other customers, the company estimated that customers,
who have not responded, owe approxim...

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