You are the junior controller of GIBSONS, a small family run retail operation. On April 11, 2019, fire damaged the office and warehouse of GIBSONS. Most of the accounting records were destroyed, but the following account balances were determined as at March 31, 2019:

Merchandise Inventory, January 1, 2019 $ 80,000

Sales (January 1 to March 31, 2019) $180,000

Purchases (January 1 to March 31, 2019) $ 94,000

The companys fiscal year end is December 31, and the company uses the periodic inventory system. From an analysis of the April bank statement, you discover cancelled checks of $4,200 for cash purchases between April 1 and April 10, 2019. Deposits during that same period totaled $18,500. Of that amount, 60% represented collections on accounts receivable and the balance was cash sales.

You have corresponded with the companys principal suppliers and it was determined that $12,400 remain on account from April 1 to April 10. Of that amount, $1,800 was for merchandise still in transit, FOB destination.

Correspondence with the principal customers produced acknowledgments of credit sales totaling $28,000 from April 1 to April 10. It is estimated that $4,600 of credit sales will never be acknowledged of recovered from customers.

GIBSONS has met with the insurance company, and they have offered an insurance payout equal to the average gross profit margins for the preceding two years. The insurance company also wants guarantees that new policies will be put in place to safeguard future inventory. The partial financial statements for the previous two years show the following data.

2018 2017

Net Sales $600,000 $480,000

Cost of Goods Purchased 416,000 356,000

Beginning Inventory 60,000 40,000

Ending Inventory 80,000 60,000

YOUR CHALLENGE

GIBSONS controller believes that the offer from the insurance company is adequate. The controller has asked you to calculate the actual loss of inventory caused by the fire. You are also required to determine the correct balance for Sales and Purchases, as of April 10; the average gross profit margin to be used for the loss calculation, and how much should actually be claimed.

You are also to advise the controller on safeguards to mitigate inventory loss in the future