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Gross Profit Method The merchandise inventory was destroyed by fire on December 13. The following data were obtained from the accounting records: Jan. 1 Merchandise Inventory $296,750 Jan. 1-Dec. 13 Purchases (net) 1,987,000 Sales (net) 3,500,000 Estimated gross profit rate 42% Estimate the cost of the merchandise destroyed. Cost of the Merchandise Destroyed Merchandise inventory, January 1 $ 296,750 Purchases (net), January 1-December 31 1,987,000 Merchandise available for sale 2,283,750 Sales (net), January 1-December 31 3,500,000 Less estimated gross profit Estimated cost of merchandise sold Estimated merchandise inventory, December 31 Feedback Check My Work Merchandise available for sale - estimated cost of merchandise sold = estimated cost of inventory. Recall that the estimated cost of merchandise sold is calculated by subtracting the estimated gross profit from the sales. b. Briefly describe the situations in which the gross profit method is useful. 1. The gross profit method is useful for estimating inventories for monthly or quarterly financial statements. 2. It is useful in estimating the cost of merchandise destroyed by fire or other disasters. 3. It is useful in reducing the carrying cost of Inventory. 4. It is useful in achieving a higher net income. Check My Work Previous

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