Chapter 6:
Exercise 6.8, page 273
The relationships between the information recorded in a periodic inventory system and the basic elements of an income statement.
| Net Sales | Beginning Inventory | Net Purchases | Ending Inventory | Cost of Goods Sold | Gross Profit | Expenses | Net Income or Loss |
| 240000 | 76000 | 104000 | 35200 | 144800 | 95200 | 72000 | 23200 |
| 480000 | 72000 | 272000 | 80000 | 264000 | 216000 | 196000 | 20000 |
| 630000 | 20700 | 586800 | 166500 | 441000 | 189000 | 148500 | 40500 |
| 810000 | 261000 | 450000 | 135000 | 576000 | 234000 | 270000 | (36000) |
| 531000 | 156000 | 393000 | 153000 | 396000 | 135000 | 150000 | (15000 |
Delegate your assignment to our experts and they will do the rest.
Cost of goods sold = Beginning Inventory + Net purchases - Ending Inventory
= 76000+ 104000 - 35200 = 144,800
Net Income (Loss) = Gross Profit - Expenses = 95200 - 72000 = 13,200
Ending Inventory = Beginning Inventory + Net Purchases - Cost of Goods sold (Bragg, 2016)
= 72000 +272000- 264000 = 80,000
Gross Profit = Sales - Cost of goods sold = 480000 - 264000 = 216,000
Expenses = Gross Profit - Net Income = 216000 - 20000 = 196,000
Net Purchases = Cost of goods sold + ending Inventory - Beginning Inventory
= 441000 +166500 - 207000 = 400,500
Net Income = 189000 -148500 = 40,500
Cost of goods sold = Sales - gross profit = 810000-234000 = 576,000
Beginning Inventory = Cost of goods sold + Ending Inventory – Purchases
= 576000 +135000 - 450000 = 261,000
Net Income (loss) = 234000 - 270000 = (36000) (Loss)
Net Sales = Cost of goods sold + gross profit
= 396000 +135000 = 531,000
Net Purchases = Cost of goods sold + ending Inventory - Beginning Inventory
= 396000+153000-156000 = 393,000
Expense = Gross profit + Net Loss = 135000 + 15000 = 150,000
Exercise 6.10, page 274
Golf World sold merchandise to Mulligans for $10,000, offering terms of 1/15, n/30, Mulligans paid.
Entries in the accounts of Golf World
| Date | Account Details | Debit $ | Credit $ | |||
| 1 | Accounts Receivables | $10,000 | ||||
| Sales | $10,000 | |||||
| (Golf World sold merchandise to Mulligan for $10,000) | ||||||
| 2 | Cost of Goods sold | $6,500 | ||||
| Inventory | $6,500 | |||||
| [To record the cost of goods sold] | ||||||
| 3 | Cash | $9,900 | ||||
| Sales Discounts | $100 | |||||
| Accounts Receivable (Mulligans) | $10,000 | |||||
| [To record the accounts receivables with 1% discount] | ||||||
Preparing journal entries in the accounting records of Mulligan:
| Date | Account Details | Debit $ | Credit $ | |||
| 1 | Inventory | $9,900 | ||||
| Accounts Payable | $9,900 | |||||
| [To record the merchandise purchases from Golf World with discount (net cost, $10,000 * 99% = $9,900] | ||||||
| 2 | Accounts Payable | $9,900 | ||||
| Cash | $9,900 | |||||
| [To record the payment of $9,900 invoice within the discount period; 1% purchases discount taken] | ||||||
Preparing journal entry to record payment after the discount period:
| Date | Account Details | Debit $ | Credit $ | |||
| 1 | Accounts Payable | $9,900 | ||||
| Purchase Discounts Lost | $100 | |||||
| Cash | $10,000 | |||||
| To record payment of account payable to Golf World and loss of purchase discount due to failure to pay within discount period. | ||||||
Problem 6.4A, page 277
Lamprino Appliance uses a perpetual inventory system.
Journal entries to record net cost
| Date | Account Details | Debit $ | Credit $ | |||
| 10- June | Inventory | $2,940 | ||||
| Accounts Payable (TVs) | $2,940 | |||||
| To record purchase of 10 TVs at net cost ($300 x 98% x 10 units) | ||||||
| 15- June | Cash | $450 | ||||
| Sales | $450 | |||||
| To record the cost of goods sold | ||||||
| 15-June | Cost of goods sold | $294 | ||||
| Inventory | $294 | |||||
| (To record the cost of goods sold) | ||||||
| 20 - June | Accounts payable (M Ind.) | $2,940 | ||||
| Cash | $2,940 | |||||
| (To record payments made to M Ind. | ||||||
Journal entries to record gross invoice price
| Date | Account Details | Debit $ | Credit $ | |||
| 10- June | Inventory | $3,000 | ||||
| Accounts Payable (M Ind.) | $3,000 | |||||
| To record the purchase of television at the invoice price | ||||||
| 15- June | Cash | $450 | ||||
| Sales | $450 | |||||
| To record the sales | ||||||
| 15-June | Cost of goods sold | $300 | ||||
| Inventory | $300 | |||||
| (To record the cost of goods sold) | ||||||
| 20 - June | Accounts payable (M Ind.) | $3,000 | ||||
| Cash (3,000 *98%) | $2,940 | |||||
| Purchase discount taken (3,000 *2%) | $60 | |||||
| (To record payments made to M Ind. By availing 2% cash discount) | ||||||
b. Pass the journal entries
| Date | Account Details | Debit $ | Credit $ | |||
| 10- July | Accounts Payable (M Ind.) | $2,940 | ||||
| Purchase Discount loss | $60 | |||||
| Cash | $3,000 | |||||
| To record payment made to M Ind. At invoice price after expiration of discount. | ||||||
2. Gross invoice prices
| Date | Account Details | Debit $ | Credit $ |
| 10- July | Accounts payable (M Ind.) | $3000 | |
| Cash | $3000 | ||
| To record payment made to M Ind. |
The net cost method provides useful information in the evaluation of the efficiency of L’s bill-paying procedures. The net cost method values the ending inventory but the gross cost method shows the inventory at gross invoice price. A shortcoming of the gross price method is that it does not direct management’s attention to discount lost (Miller-Nobles et al., 2016).
Case 6.1, page283-284
Periodic Inventory or perpetual inventory system
The frontier shop would use a period inventory system. It is a small business that does not have computerized accounting system and would record only dollar amount at the time of sale. The records are maintained by a book keeper who comes at the end of each month shows a periodic inventory system.
Allister’s corner would use a perpetual inventory system. This is due to the high unit cost of the paintings comprising of the company’s inventory. The management would want quantity, cost, and identity of painting stock indicated through the paintings in stock makes the perpetual ideal.
The publicly owned publishing company would use a perpetual inventory system. The company needs to have the necessary quantity of books in order to service its customers. The company must also issue quarterly financial statements which is best done in the perpetual inventory system (Lessambo, 2018).
Toys-4 You would use a perpetual inventory system. Point-of-sale terminals can maintain the inventory system. The headquarters is provided with information about weekly profitability. The size of the company suggests a publicly owned corporation with quarterly reporting best done with the perpetual inventory system.
An ice cream truck would use a periodic inventory system. He is the operator of a small business and it would be impossible to use a perpetual system as it would involve recording the cost of each ice cream bar sold separately. There is no significant inventory as the quantity of ice cream purchased would be close to that sold.
TransComm would use a perpetual inventory system. The company does not know how may units are on hand at a time so as to know whether the company can fill large sale orders. The company sells only one product making a perpetual inventory system simple. TransComm’s accounting are maintained on commercial accounting software which maintain their inventory on perpetual inventory systems.
References
Bragg, S. M. (2016). Cost accounting fundamentals . Colorado, CO: AccountingTools, Incorporation.
Lessambo, F. I. (2018). Financial Statements: Analysis and Reporting . Springer.
Miller-Nobles, T. L., Mattison, B., & Matsumura, E. M. (2016). Horngren's Financial & Managerial Accounting: The Managerial Chapters . Pearson.
