Hello, Could someone help me solve question#5 here. Thank you! Required a. Determine the amount of inventory loss from the hurricane. b. Do you feel the insurance company’s approach is fair? Explain in detail with supporting calculations.

Question #5

On December 5, 2019, a hurricane destroyed the merchandise inventory of the Key West Music Company. In a waterproof secure safe were the company’s records with the following information:

Key West Music Company

Trial Balance

September 30, 2019

Debit        Credit

Cash . . . . . . . . . . . . . . .  $315,325

Accounts Receivable. . . . . . . .    36,888

Inventory, December 31, 2018 . . .   129,226

Equipment. . . . . . . . . . . . .   200,775

Accumulated Depreciation . . . . .               $ 32,670

Accounts Payable to Suppliers. . .                 31,908

Other Current Liabilities. . . . .                  2,000

Common Stock . . . . . . . . . . .                 60,000

Retained Earnings. . . . . . . . .                 41,482

Sales. . . . . . . . . . . . . . .               1,246,624

Sales Returns and Allowances . . .    17,900

Purchases. . . . . . . . . . . . .   546,930

Purchase Returns and Allowances. .                 3,582

Sales and Administrative Expenses.    50,657

Other General Expenses . . . . . .   120,565      _______

                                  $1,418,266  $1,418,266

                                 

Note: The Company’s 12 month fiscal year ends December 31st.

Through correspondence with suppliers, customers, the bank, etc. the following additional information has also been collected:

1. Correspondence with suppliers revealed unrecorded obligations at December 5th of $120,734.  These unrecorded liabilities pertained to shipments in October totaling $58,365, shipments in November of $50,635, and $10,000 for shipments still in transit on December 5th shipped FOB Destination, and also $1,734 for shipments still in transit FOB Shipping Point.

2. Customers of the company have acknowledged indebtedness of $94,950 as of December 5th.  Based on no responses from several other customers, the company estimated that customers, who have not responded, owe approximately $12,650. Finally, based on past experience, it is estimated that 2.25% of accounts receivable will be uncollectible.

3. Bank statements and the canceled checks enclosed with the statements for October, November and through December 5th , revealed the following:

                                October  November December

Disbursement Activity

Payments on Accounts Payable

Existing at September 30th     $19,650  $12,258 $ --

 

Payments for October 

Inventory Shipments           11,650   21,460 10,695

Payments for November

Inventory Shipments             --    25,870 4,732

Payments for December

Inventory Shipments -- -- 12,635

Deposit Activity

Received on Account

From Customers              18,125   14,330 2,224

Refund from Vendor For

Merchandise Returned on

August 31, 2019            --   -- 3,950*

*This refund was delayed until December 2, 2019 because the supplier had lost the claim submitted by Key West Music Company.

4. The insurance company is proposing a settlement of the company’s claim based on the overall gross profit for the most recent two fiscal years.  Scheduled below is information obtained from prior financial statements covering 2018 and 2017:

                                   For The Years Ended

                                       December 31st

  2018           2017

Sales                          $671,108       $709,335

Sales Returns and Allowances     5,761          6,985      

Beginning Inventory              57,569         50,345

Purchases                       319,968        341,977    

Purchase Returns and Allowances   1,235           916

Ending Inventory                129,226         57,569

Required

a. Determine the amount of inventory loss from the hurricane.

b. Do you feel the insurance company’s approach is fair? Explain in detail with supporting calculations.