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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