Reena Corp. lost most of its inventory in a fire in December, just before the year-end physical inventory was taken. The corporations books disclosed the following:

Beginning inventory $440,000

Sales $1,350,000

Purchases for the year 850,000

Sales returns 50,000

Purchase returns 55,000

Gross margin on sales 40%

Merchandise with a selling price of $42,000 remained undamaged after the fire. Damaged merchandise with an original selling price of $30,000 had a net realizable value of $10,600.

Instructions

a) Calculate the amount lost because of the fire, assuming that the corporation had no insurance coverage.

b) Prepare the journal entry to record the loss and account for the damaged inventory in a separate Damaged Inventory account. In the same entry, record cost of goods sold for the year ended December 31.

c) How would the loss be classified on the income statement of Reena?

d) An icon reads, Digging Deeper. While the gross profit percentage has averaged 40% over the past five years, it has been as high as 42% and as low as 37.5%. Given this information, should a range of possible loss amounts be provided instead of a single figure? Explain.