On January 1, a store had inventory of $48,000. January purchases were $46,000 and January sales were $95,000. On February 1 a fire destroyed most of the inventory. The rate of gross profit was 25% of cost. Merchandise with a selling price of $5,000 remained undamaged after the fire. A.) Compute the amount of the fire loss, assuming the store had no insurance coverage. Label all figures.
B.) Prepare any journal entries necessary to reconcile inventory.

Answer and Explanation:

a. The computation of the amount of fire loss is as follows:

Fire loss = Beginning inventory + January Purchase - Cost of sale - Cost of undamaged inventory

Where,

Cost of sale = $95,000 ÷ 125% = $76,000

And cost of undamaged inventory = $5,000 ÷ 125% = $4,000

Now place the above value

So,

Fire loss is

= $48,000 + $46,000 - $76,000 - $4,000

= $14,000

b. The journal entry is

Loss on sale of fire $14,000

         To Inventory $14,000

(Being the loss on sale of fire is recorded)

Here the loss on sale of fire is debited as it increased the losses and credited the inventory as it reduced the assets