Underwater, inc. had a flood in its plant that destroyed most of its inventory. its records show that beginning inventory was $20,000. underwater made purchases of $250,000 and sales of $300,000 during the year. its normal gross profit percentage is 35%. it can sell some of its damaged inventory for $7,500. the insurance company will reimburse underwater for 75% of its loss. what amount should underwater report as loss from the flood?

$ 16,875

Explanation:

Beginning Inventory$  20,000  

Purchases                 $ 250,000  

Sales                         $ 300,000  

Gross Profit:                          35%  

Inventory before flood determination:

Cost of Sales ( 100% - 35% ) x Sales  

= ( 1 - 0.35 ) x 300.000   --->   Cost of Sales

=  195,000  

Sales         300,000.00         100%

Cost         195,000.00         65%

Gross Profit:105,000.00         35%

Beginning Inventory    $    20,000  

Purchases               $  250,000  

Sales                            -$   195,000  

Inventory before flood:  $  75,000  

Inventory before flood:    $     75,000  

Inventory damaged sold: $    -7,500  

Net Loss:                    $    67,500

Insurance Reimbursement:$ 50,625.00( 67,500 x 75% )

Net Loss from flood:$ 16,875 ( 67,500 - 50,625 )

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