Problem 2-47 Inventory Estimates; Partial Data (LO 2-5, 2-6) On May 10, after the close of business, Fresno Furniture Company had a devastating fire that destroyed the company’s work-in-process and finished-goods inventories. Fortunately, all raw materials escaped damage because materials owned by the firm were stored in another warehouse. The following information is available: Sales revenue through May 10 $ 320,000 Income before taxes through May 10 68,000 Direct labor through May 10 120,000 Cost of goods available for sale, May 10 275,000 Work-in-process inventory, January 1 21,000 Finished-goods inventory, January 1 35,000 Fresno Furniture Company’s accountants determined that the cost of direct materials used normally averages 25 percent of prime costs (i.e., direct material + direct labor). In addition, manufacturing overhead is 50 percent of the firm’s total production costs. The gross margin is 30 percent of sales. Required: The company is in the process of negotiating a settlement with its insurance company. 1. Calculate the cost of finished-goods inventory that was destroyed by the fire. 2. Calculate the cost of work-in-process inventory that was destroyed by the fire.

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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Problem 2-47 Inventory Estimates; Partial Data (LO 2-5, 2-6)

On May 10, after the close of business, Fresno Furniture Company had a devastating fire that destroyed the company’s work-in-process and finished-goods inventories. Fortunately, all raw materials escaped damage because materials owned by the firm were stored in another warehouse. The following information is available:


Sales revenue through May 10	$	320,000
Income before taxes through May 10		68,000
Direct labor through May 10		120,000
Cost of goods available for sale, May 10		275,000
Work-in-process inventory, January 1		21,000
Finished-goods inventory, January 1		35,000

Fresno Furniture Company’s accountants determined that the cost of direct materials used normally averages 25 percent of prime costs (i.e., direct material + direct labor). In addition, manufacturing overhead is 50 percent of the firm’s total production costs. The gross margin is 30 percent of sales.

Required:

The company is in the process of negotiating a settlement with its insurance company.

1.	Calculate the cost of finished-goods inventory that was destroyed by the fire.

2.	Calculate the cost of work-in-process inventory that was destroyed by the fire.

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