On November 21, 2019, a flood at Hodge Company's warehouse caused severe damage to its entire inventory of Product Tex. Hodge estimates that all usable damaged goods can be sold for $9,000. The following information was available from Hodge's accounting records for Product Tex:

Inventory at November 1, 2019		$101,000
Purchases from November 1, 2019, to date of flood		149,000
Net sales from November 1, 2019, to date of flood		209,000

Based on recent history, Hodge had a gross margin (profit) on Product Tex of 30% of net sales.

Required:

Question Content Area

1. Prepare a schedule to calculate the estimated loss on the inventory in the flood, using the gross profit method.

HODGE COMPANY Calculation of Estimated Loss on Inventory in the Flood Using Gross Margin (Profit) Method November 21, 2019

Accounts PayableCashCost of goods available for saleEstimated cost of goods soldEstimated gross margin (profit)Estimated loss on inventory in the floodInventory at November 1, 2019Net sales from November 1, 2019, to date of floodPurchases from November 1, 2019, to date of floodSalvage goods		$- Select -
Accounts PayableCashCost of goods available for saleEstimated cost of goods soldEstimated cost of inventory at date of floodEstimated gross margin (profit)Estimated loss on inventory in the floodNet sales from November 1, 2019, to date of floodPurchases from November 1, 2019, to date of floodSalvage goods		- Select -
Accounts PayableCashCost of goods available for saleEstimated cost of goods soldEstimated cost of inventory at date of floodEstimated gross margin (profit)Estimated loss on inventory in the floodInventory at November 1, 2019Net sales from November 1, 2019, to date of floodPurchases from November 1, 2019, to date of flood		$- Select -
Estimated cost of goods sold
Accounts PayableCashCost of goods available for saleEstimated cost of goods soldEstimated gross margin (profit)Estimated loss on inventory in the floodInventory at November 1, 2019Net sales from November 1, 2019, to date of floodPurchases from November 1, 2019, to date of floodSalvage goods	$- Select -
Add: CashAdd: Cost of goods available for saleAdd: Estimated cost of goods soldAdd: Estimated gross margin (profit)Add: Salvage goodsLess: Estimated gross margin (profit)Less: Estimated loss on inventory in the floodLess: Inventory at November 1, 2019Less: Net sales from November 1, 2019, to date of floodLess: Purchases from November 1, 2019, to date of flood	- Select -	- Select -
Accounts PayableCashCost of goods available for saleEstimated cost of goods soldEstimated cost of inventory at date of floodEstimated loss on inventory in the floodInventory at November 1, 2019Net sales from November 1, 2019, to date of floodPurchases from November 1, 2019, to date of floodSalvage goods		$- Select -
Add: CashAdd: Cost of goods available for saleAdd: Estimated cost of goods soldAdd: Estimated gross margin (profit)Add: Salvage goodsLess: Estimated cost of inventory at date of floodLess: Estimated gross margin (profit)Less: Estimated loss on inventory in the floodLess: Inventory at November 1, 2019Less: Salvage goods		- Select -
Accounts PayableCashCost of goods available for saleEstimated cost of goods soldEstimated gross margin (profit)Estimated loss on inventory in the floodInventory at November 1, 2019Net sales from November 1, 2019, to date of floodPurchases from November 1, 2019, to date of floodSalvage goods		$- Select -

Question Content Area

2.	The gross profit method may not provide an accurate estimate of ending inventory when:

A LIFO liquidation has occurred.Different types of inventory have different markups.Sales returns and allowances have changed from prior years.All of the choices may result in inaccurate estimates of ending inventory when using the gross profit method.