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Brad Essary owned a small company that sold garden equipment. The equipment was expensive, and a perpetual system was maintained for control purposes. Even so, lost, damaged, and stolen merchandise normally amounted to 4 percent of the inventory balance. On June 14, Essary's warehouse was destroyed by fire. Just prior to the fire, the accounting records contained a $138,000 balance in the Inventory account. However, inventory costing $17,000 had been sold and delivered to customers but had not been recorded in the books at the time of the fire. The fire did not affect the showroom, which contained inventory that cost $35,200. Required Estimate the amount of inventory destroyed by fire. Inventory destroyed by fire

Brad Essary owned a small company that sold garden equipment. The equipment was expensive, and a perpetual system was maintained for control purposes. Even so, lost, damaged, and stolen merchandise normally amounted to 4 percent of the inventory balance. On June 14, Essary's warehouse was destroyed by fire. Just prior to the fire, the accounting records contained a $138,000 balance in the Inventory account. However, inventory costing $17,000 had been sold and delivered to customers but had not been recorded in the books at the time of the fire. The fire did not affect the showroom, which contained inventory that cost $35,200. Required Estimate the amount of inventory destroyed by fire. Inventory destroyed by fire

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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**Case Study: Inventory Estimation After Warehouse Fire** **Background:** Brad Essary owned a small company that sold garden equipment. The equipment was expensive, and a perpetual inventory system was maintained for control purposes. Despite this system, lost, damaged, and stolen merchandise typically amounted to 4 percent of the inventory balance. **Incident:** On June 14, Essary's warehouse was destroyed by fire. Prior to the fire, the accounting records noted an inventory balance of $138,000. However, inventory valued at $17,000 had been sold and delivered to customers but had not been updated in the books at the time of the fire. It's also important to note that the fire did not impact the showroom, which housed inventory costing $35,200. **Task:** Estimate the amount of inventory destroyed by fire. **Calculation:** 1. **Recorded inventory before the fire:** $138,000 2. **Inventory sold but not recorded:** $17,000 3. **Unchanged showroom inventory:** $35,200 **Procedure:** 1. Subtract the unrecorded sold inventory from the total inventory: $138,000 - $17,000 = $121,000 2. Deduct the unaffected showroom inventory: $121,000 - $35,200 = $85,800 Thus, the estimated amount of inventory destroyed by the fire is **$85,800**. --- This example showcases how businesses need to accurately maintain records for effective loss estimation, especially in unexpected incidents like fire. Understanding and applying proper accounting principles helps in accurate financial reporting and insurance claims.
Transcribed Image Text:**Case Study: Inventory Estimation After Warehouse Fire** **Background:** Brad Essary owned a small company that sold garden equipment. The equipment was expensive, and a perpetual inventory system was maintained for control purposes. Despite this system, lost, damaged, and stolen merchandise typically amounted to 4 percent of the inventory balance. **Incident:** On June 14, Essary's warehouse was destroyed by fire. Prior to the fire, the accounting records noted an inventory balance of $138,000. However, inventory valued at $17,000 had been sold and delivered to customers but had not been updated in the books at the time of the fire. It's also important to note that the fire did not impact the showroom, which housed inventory costing $35,200. **Task:** Estimate the amount of inventory destroyed by fire. **Calculation:** 1. **Recorded inventory before the fire:** $138,000 2. **Inventory sold but not recorded:** $17,000 3. **Unchanged showroom inventory:** $35,200 **Procedure:** 1. Subtract the unrecorded sold inventory from the total inventory: $138,000 - $17,000 = $121,000 2. Deduct the unaffected showroom inventory: $121,000 - $35,200 = $85,800 Thus, the estimated amount of inventory destroyed by the fire is **$85,800**. --- This example showcases how businesses need to accurately maintain records for effective loss estimation, especially in unexpected incidents like fire. Understanding and applying proper accounting principles helps in accurate financial reporting and insurance claims.
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