Assume McMillan Tire Ltd. lost some inventory in a fire. To file an insurance claim, McMillan must estimate its ending inventory by the gross profit method. Assume that, for the past two years, McMillan's gross profit has averaged 40% of net sales. Suppose the company's inventory records reveal the following data at June 15, 2014, the date of the fire:
Inventory, January 1 .......................................................................... $1,200,000
Transactions during the year:
Purchases .......................................................................................... 6,500,000
Purchase discounts............................................................................ 100,000
Purchase returns ............................................................................... 10,000
Sales revenue .................................................................................... 8,600,000
Sales returns ..................................................................................... 20,000
Requirements
1. Estimate the cost of the ending inventory lost in the fire using the gross profit method.
2. Prepare McMillan Tire Ltd.'s income statement through gross profit for the period up to the date of the fire. Date the statement "For the Period Up to the Fire." Show the detailed computations of cost of goods sold in a separate schedule.