The inventory of Cullumber Company was destroyed by fire on March 1. From an examination of the accounting records, the following data for the first 2 months of the year are obtained:

Sales Revenue $51,000.

Sales Returns and Allowances $1,100.

Purchases $31,000.

Freight-In $1,200, and Purchase Returns and Allowances $1,500.

Required:

Determine the merchandise lost by fire, assuming:

1. A beginning inventory of $20,000 and a gross profit rate of 40% on net sales.

2. A beginning inventory of $30,000 and a gross profit rate of 30% on net sales.

a. Merchandise lost by fire value = $20,760

b. Merchandise lost by fire value = $25,770

Explanation:

Net sales = $51,000 - $1,100

= $49,900

Net purchase cost = $31,000 + 1,200 - $1,500

= $30,700

a. Gross profit = $49,900 * 40%

= $19,960

Cost of goods sold = $49,900 - $19,960

= $29,940

Cost of goods sold = beginning inventory + Purchases - ending inventory

= $29,940 = $20,000 + $30,700 - ending inventory

Ending inventory = $20,760

Merchandise lost by fire value = $20,760

b. Gross profit = $49,900 * 30%

= $14,970

Cost of goods sold = $49,900 - $14,970

= $34,930

Cost of goods sold = beginning inventory + Purchases - ending inventory

= $34,930 = $30,000 + $30,700 - ending inventory

ending inventory = $25,770

Merchandise lost by fire value = $25,770