I am not getting this one…..
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
D.
$15,000
The explanation for solving shows:
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
BUT…where I'm getting confused is the sales of $620,000 with a gross profit percentage of 25%. The explanation for the question shows it as 620,000 x .25 = 155,000. I think it should be 620,000 / 1.25 = 496,000. This directly gives me COGS of 496,000.
Am I completely wrong????
FAR: 74, 83
REG: 76
BEC: 77
AUD: 89
.