Headstrong Hardware lost most of its inventory in an electrical fire that destroyed the company’s warehouse and retail store in 2016. Fortunately, the accounting records were backed up on the owner’s computer in her home office and could, therefore, be recovered. However, Headstrong uses the periodic inventory system. Therefore, it could not determine the amount of inventory that was lost in the fire because the inventory was destroyed.
Headstrong’s insurance company requires Headstrong to prepare a reasonable estimate of the lost inventory before it can process the insurance claim.
You are Headstrong’s accountant. You review the accounting for 2015 and 2016 (to the date of the fire) and obtain the following information:
1. Sales in 2015 were $963,000.
2. Sales in 2016 up to the time of the fire amounted to $678,000.
3. Cost of goods sold in 2015 was $597,060.
4. 2016 inventory purchased to the date of the fire totalled $486,000.
5. The ending inventory reported on the 2015 statement of financial position was $88,000.
Required:
Prepare an estimate of the amount of inventory lost in the fire.