Question 5 (4 MARKS)

Fire totally destroyed Young's inventory on October 11, 2015. In order to claim fire insurance, Young needs to derive the amount of inventory loss in the fire.Young uses the periodic inventory system in his business and hence, the gross profit method of estimating inventory would be most appropriate to estimate the losses. In the past, Young has always aimed and maintained a gross profit margin of 40%.On the date of the fire, the accountant has managed to save the ledger with the following balances.

Merchandise inventory, January 1 $ 260,000

Purchase return and allowance, until Oct 1112,000

Purchase discount 600

Freight-in cost1,000

Purchases until Oct 111,912,600

Net sales, Jan 1 - Oct 113,200,000

Required:

Estimate the amount of inventory loss based on the gross profit method.