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Financial Accounting-II -Inventories and Cost of goods sold (COGS)
PU BBA | BBA-BI | BBA-TT 2nd Semester
Gross Profit method related:
PU 2010 Fall Q. No. 1b
On February 12, a hurricane destroyed the entire inventory of Suncoast Corporation. An estimate of the amount of inventory lost is needed for insurance purpose. The following information is available:
Inventory in January 1 Rs. 15,400
Net sales from January 1 to February 12 105,300
Purchase from January 1 to February 12 84,230
Suncoast estimates its gross profit ratio as 25% of net sales. The insurance company has agreed to pay Suncoast Rs. 10,000 as a settlement for the inventory destroyed.
Required: Prepare the journal entry on Suncoast’s books to recognize the inventory lost and the insurance reimbursement. [5]
Solution:
Using the Gross Profit Method
Cost of goods available for sale = Beginning inventory + Purchase = Rs. 15,400 + 84,230 = Rs. 99,630
Sales = Rs. 1,05,300
Gross profit ratio = 25%
Gross profit amount = 25% of Sales = Rs. 26,325
Cost of goods sold = Sales – Gross profit = Rs. 1,05,300 – 26,325 = Rs. 78,975
Cost of ending inventory before hurricane = Cost of goods available for sale – Cost of goods sold = Rs. 99,630 – 78,975 = Rs. 20,655
Inventory destroyed by hurricane = Ending inventory before hurricane – Not destroyed (units on hand) = Rs. 20,655 – 0 = Rs. 20,655
Net loss of inventory = Inventory destroyed – Insurance receivable 20,655 – 10,000 = Rs. 10,655
Journal Entry
In the books of Suncoast’s Company
February 12
Insurance receivable a/c Dr. Rs. 10,000
Loss of inventory a/c Dr. Rs. 10,655
Inventory a/c Rs. 20,655
(To record the loss of inventory and partially settled by the insurance company)