Question
A fire destroyed most of Westcombe Hardware's warehouse on April 18, 2026. The accounting records survived and show, for January 1 to April 18:
| Item | Amount |
|---|
| Inventory, January 1 | $85,000 |
| Purchases | 240,000 |
| Purchase returns | 5,000 |
| Freight-in | 6,000 |
| Sales | 380,000 |
| Sales returns | 10,000 |
Westcombe's gross profit has been a steady 35% of net sales for several years. Goods costing $12,000 were salvaged undamaged. The insurer has agreed to pay 80% of the cost of the inventory destroyed.
Required:
- Estimated Cost of Sales — estimated cost of goods sold from January 1 to April 18.
- Inventory at the Fire — estimated inventory on hand immediately before the fire.
- Inventory Destroyed — the cost of inventory destroyed.
- Journal Entry — record the loss on April 18. Use Insurance Claim Receivable, Fire Loss and Inventory.
Statements in this challenge
- Estimated Cost of SalesNumeric Answer
- Inventory at the FireNumeric Answer
- Inventory DestroyedNumeric Answer
- Journal EntryJournal Entry
Scoring
- 40% Account naming / line matching
- 40% Amount correctness
- 20% Structure / section placement
IAS 2 — Inventories
Cost includes purchase price, import duties, transport and handling, less trade discounts and rebates. The cost formula — FIFO or weighted average — is then applied consistently to inventories of a similar nature and use.
Common mistakes
- Recomputing the weighted average only at the period end when a moving average is required under a perpetual system.
- Including selling costs or storage of finished goods in inventory cost.
- Switching cost formula between periods without treating it as a change of accounting policy.
IFRS vs US GAAP: US GAAP permits LIFO; IAS 2 prohibits it.
Further readingIAS 2: costing methods and NRV