A fire destroyed a warehouse of the Goren Group, Inc., on May 4, 2021. Accounting records on that date indicated the following: Merchandise inventory, January 1, 2021 $ 1,970,000 Purchases to date 5,870,000 Freight-in 470,000 Sales to date 8,900,000 The gross profit ratio has averaged 20% of sales for the past four years. Required: Use the gross profit method to estimate the cost of the inventory destroyed in the fire.

$1,190,000

Explanation:

The computation of cost of the inventory is given below:-

For computing the cost of inventory first we need to find out the cost of goods sold which is shown below:-

Cost of goods sold = Sales - Estimated gross profit

= $8,900,000 - ($8,900,000 × 20%)

= $7,120,000

Now, the Cost of the inventory = Beginning inventory + Purchase + Freight - Cost of goods sold

= $1,970,000 + $5,870,000 + $470,000 - $7,120,000

= $8,310,000 - $7,120,000

= $1,190,000

So, for computing the cost of the inventory we have applied the above formula.

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