Financial Accounting-II -Inventories and Cost of goods sold (COGS)
PU BBA | BBA-BI | BBA-TT 2nd Semester
Gross profit method: Insurance reimbursement journal entry
PU 2011 Fall Q. No. 1b
On July 1, 2006, an explosion destroyed a store of raw materials. The insurance company has agreed to pay store Rs. 10,000 s a settlement for the inventory destroyed. But an estimate of the amount of inventory lost is needed for insurance purposes. The following information is available:
Beginning inventory Rs. 24,000
Purchases, January – June 23,000
Sales, January – June 40,000
Inventory not destroyed 2,000
Gross profit margin 20%
Determine the inventory lost and prepare the journal entry on this store books to recognize the inventory lost as well as the insurance reimbursement. [5+2]
Solution:
Using the Gross Profit Method
Cost of goods available for sale = Beginning inventory + Purchases = 24,000 + 23,000 = Rs. 47,000
Sales = Rs. 40,000
Gross profit margin = 20%
Gross profit amount = 20% of Sales = 20 % of 40,000 = Rs. 8,000
Cost of goods sold (COGS) = Sales – Gross profit amount = 40,000 – 8,000 = Rs. 32,000
Cost of ending inventory before explosion = Cost of goods available for sale – Cost of goods sold = 47,000 – 32,000 = Rs. 15,000
Inventory destroyed by fire = Ending inventory before explosion – Inventory no destroyed = 15,000 – 2,000 = Rs. 13,000
Loss of Inventory = Insurance receivable – Inventory not destroyed = Rs. 10,000 – 13,000 = Rs. 3,000
Journal Entry
February 10, 2019
Insurance receivable a/c Dr. Rs. 10,000
Loss of inventory a/c Dr. Rs. 3,000
Inventory a/c Rs. 13,000
(To record the loss of inventory and partially settled by the insurance company)