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    Gross Profit Method.

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    P9-4) Gross Profit Method:

    David Hasselholf Company lost most of its inventory in a fire in December just before the year end physical inventory was taken. Corporate records disclose the following.

    Inventory ......................80000 Purchases.....................280000

    Purchases return..............28000 Sales...........................415000

    Sales Return....................21000 Gross Profit % based on net selling price.....................34%

    Merchandise with a selling price of $30000 remained undamaged after the fire, and damaged merchandise has a salvage value of $7150. The company does not carry fire insurance on its inventory.

    Instructions:
    Prepare a formal labeled schedule computing the fire loss incurred (do not use the retail inventory method).

    Problem 11-11

    (Depreciation for Partial Periods- SL-Act., SYD, and DDB)
    On January 1, 2005, a machine was purchased for $77,000. The machine has an estimated salvage value of $5,000 and an estimated use full life of % years. The machine can operate for 100,000 hours before it needs to be replaced. The company closed its books on December 31 and operates the machine as follows: 2005, 20,000 hours, 2006, 25,000 hours; 2007, 15,000 hours; 2009, 10,000 hours.

    Instructions:

    A) Compute the annual depreciation charges over the machine's life assuming a December 31 year end for each of the following depreciation methods.
    1- Straight line method
    2- Activity Method
    3- Sum of the year's digits methods
    4- Double declining balance method

    B) Assume the fiscal year end of September 30. Compute the annual depreciation charges over the asset's life applying each of the following g methods.
    1- Straight line method
    2- Activity Method
    3- Sum of the year's digits methods
    4- Double declining balance method

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    Solution Preview

    P9-4) Gross Profit Method:

    David Hasselholf Company lost most of its inventory in a fire in December just before the year end physical inventory was taken. Corporate records disclose the following.

    Inventory ......................80000 Purchases.....................280000

    Purchases return..............28000 Sales...........................415000

    Sales Return....................21000 Gross Profit % based on net selling price.....................34%

    Merchandise with a selling price of $30000 remained undamaged after the fire, and damaged merchandise has a salvage value of $7150. The company does not carry fire insurance on its inventory.

    Instructions:
    Prepare a formal labeled schedule computing the fire loss incurred (do not use the retail inventory method).

    According to the Gross profit method (before the fire):

    Beginning inventory (at cost) $80,000
    Purchases (at cost) 280,000
    Less: Purchases return 28,000
    Goods available (at cost) 332,000
    Sales (at selling price) $415,000
    Less: Gross profit (34% of $415,000) 141,100
    Sales (at cost) 273,900
    Approximate inventory (at cost) $58,100

    After the fire:

    Beginning inventory (at cost) $37,150 (30,000 undamaged + 7,150 salvage)
    Purchases (at cost) 280,000
    Less: Purchases ...

    Solution Summary

    The solution prepares a formal labeled schedule computing the fire loss incurred. The annual depreciation charges are computed over the machine's life.

    $2.19

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