On April 10,2008, fire damaged the office and warehouse of Inwood Company. Most of the accounting records were destroyed, but the following account balances were determined as of March 31, 2008: Merchandise Inventory, January 1, 2008, \($80,000;\) Sales (January 1—March 31, 2008), \($180,000;\) Purchases (January 1-March 31, 2008) \($94,000.\) eu, The company’s fiscal year ends on December 31. It uses a periodic inventory system.

From an analysis of the April bank statement, you discover cancelled checks of \($4,200\) for cash purchases during the period April 1-10. Deposits during the same period totaled \($18,500.\) Of that amount, 60% were collections on accounts receivable, and the balance was cash sales.

Correspondence with the company’s principal suppliers revealed \($12,400\) of purchases on account from April 1 to April 10. Of that amount, \($1,600\) was for merchandise in transit on April 10 that was shipped FOB destination.

Correspondence with the company’s principal customers produced acknowledgments of credit sales totaling \($37,000\) from April 1 to April 10. It was estimated that \($5,600\) of credit sales will never be acknowledged or recovered from customers.

Inwood Company reached an agreement with the insurance company that its fire-less claim should be based on the average of the gross profit rates for the preceding 2 years. The financial statements for 2006 and 2007 showed the following data.

Inventory with a cost of \($17,000\) was salvaged from the fire.
Instructions With the class divided into groups, answer the following.

(a) Determine the balances in (1) Sales and (2) Purchases at April 10.

(b) Determine the average profit rate for the years 2006 and 2007.

(c) Determine the inventory loss as a result of the fire, using the gross profit method.

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2007 2006 Net sales $600,000 $480,000 Cost of goods purchased 404,000 356,000 Beginning inventory 60,000 40,000 Ending inventory 80,000 60,000