[Anonymous]

NINJA Question –

Also, if there’s a way we can search for/through questions people have already asked please let me know b/c someone might have asked this already. Here’s the problem and answer:

Fireworks, Inc., had an explosion in its plant that destroyed most of its inventory. Its records show that beginning inventory was $40,000. Fireworks made purchases of $480,000 and sales of $620,000 during the year. Its normal gross profit percentage is 25%. It can sell some of its damaged inventory for $5,000. The insurance company will reimburse Fireworks for 70% of its loss. What amount should Fireworks report as loss from the explosion?

A.

$50,000

B.

$35,000

C.

$18,000

Correct D.

$15,000

This problem must be solved using the gross profit method:

Goods available for sale = $40,000 + $480,000 = $520,000

Gross profit = $620,000 × 0.25 = $155,000

Cost of goods sold = $620,000 – $155,000 = $465,000

Ending inventory = $520,000 – $465,000 = $55,000

Reimbursement = ($55,000 – $5,000) × 0.70 = $35,000

Loss = $55,000 – $5,000 – $35,000 = $15,000

My question is how come it looks like you’re subtracting the money you can get ($5000) for the damaged inventory twice, isn’t it being double counted? Thank you.

[Missy]

You're not really subtracting the 5000 twice. You're using it once to determine the amount of the reimbusement and once to determine the loss. The same way the $55k is used twice (to determine reimbursement and determine loss)

Licensed Massachusetts Non Reporting CPA since 2012
Finance/Admin/HR Manager

[johnny_debt]

@cpa565

It is not being counted twice. The 5,000 of inventory is still in salable condition and can be considered undamaged/not destroyed. Therefore the insurance company will not reimburse on that inventory.

The lost would be the inventory not reimbursed by the insurance company. In order to calculate the reimbursement you would need to remove from ending inventory the salable inventory, since the insurance company won't reimburse that. See following for calculation of reimbursement.

Reimbursement = ($55,000 – $5,000) × 0.70 = $35,000

Calculate from the damaged inventory and subtract from it the reimbursement to calculate the loss. See Following.

Loss = $55,000 – $5,000 – $35,000 = $15,000. This formula is the following (Total ending inventory including damaged/undamaged goods – undamaged goods = damaged goods – reimbursement = loss).

AUD - 91
BEC - 84
FAR - 91
REG - 91

[CPA soon]

Loss was mitigated from 55k to 50k because you sell inventory for 5k. Insurance reimburses 70% of a 50k loss which is 35k, you lose 15k. Why over complicating??

FAR - 71, 68, 74, (8/31/14) 78 ✔
REG - 67, 71, 71, (10/18/14) 78 ✔
BEC - (11/29/14) 86 ✔
AUD - 73, (4/4/15) 86 ✔

I can't believe this is over! 2 years and 3 months..

[Anonymous]

Thank you so much guys – I get your point CPASoon but sometimes studying for this test with all the little gotchas gets one paranoid 🙂

[Author]

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