On November 21, 2016, a flood at Hodge Company's warehouse caused severe damage to its entire inventory' of Product Tex. Hodge estimates that all usable damaged AICPA goods can be sold for $10,000. The following information was available from Hodge's accounting records for Adapted Product Tex:
Inventory at November 1,2016............. $100,000
Purchases from November 1,2016, to dale of flood..... 140.000
Net sales from November 1,2016, to dale of flood...... 220,000
Based on recent history', Hodge had a gross margin (profit) on Product Tex of 30% of net sales.
Required:
1. Prepare a schedule to calculate the estimated loss on the inventory' in the flood, using the gross profit method. Show supporting computations in good form.
2. Next Level Describe situations in which the gross profit method may not provide an accurate estimate of ending inventory.