Chapter 6, Problem 1AP

a.

To determine

Prepare the journal entry to record the transactions and events in the accounting records of Company CH under perpetual inventory system.

Explanation of Solution

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Perpetual Inventory System refers to the inventory system that maintains the detailed records of every inventory transactions related to purchases and sales on a continuous basis. It shows the exact on-hand-inventory at any point of time.

Prepare the journal entry to record the transaction and events:

November 05: To record the sale of lumber on account to Construction B.

Date	Accounts title and explanation	Debit ($)	Credit ($)
November 5	Accounts receivable (Construction B)	13,390
	Sales		13,390
	(To record the sale of lumber on account to Construction B)

Table (1)

• Accounts receivable is an asset account and it is increased. Therefore, debit accounts receivable with $13,390.
• Sale is a revenue account and it increases the stockholders’ equity account. Therefore, credit sales account with $13,390.

November 5: To record the cost of goods sold.

Date	Accounts title and explanation	Debit ($)	Credit ($)
November 5	Cost of goods sold	9,105
	Inventory		9,105
	(To record the cost of goods sold)

Table (2)

• Cost of goods sold is an expense account and it decreases the stockholders’ equity. Therefore, debit cost of goods sold with $9,105.
• Inventory is an asset account and it is decreased. Therefore, credit inventory with $9,105.

November 9: To record the purchase of merchandise on credit from Company OT.

Date	Accounts title and explanation	Debit ($)	Credit ($)
November 9	Inventory	3,800
	Accounts payable (Company OT)		3,800
	(To record the purchase of merchandise on credit)

Table (3)

• Inventory is an asset account and it is increased. Therefore, debit inventory account with $3,800.
• Accounts payable is a liability account and it is increased. Therefore, credit accounts payable with $3,800.

December 5: To record the collection of cash from Construction B.

Date	Accounts title and explanation	Debit ($)	Credit ($)
December 9	Cash	13,390
	Accounts receivable (Construction B)		13,390
	(To record the collection of cash from Construction B)

Table (4)

• Cash is an asset account and it is increased. Therefore, debit cash account with $13,390.
• Accounts receivable is an asset account and it is decreased. Therefore, credit accounts receivable account with $13,390.

December 9: To record the payment made to Company OT.

Date	Accounts title and explanation	Debit ($)	Credit ($)
December 9	Accounts payable (Company OT)	3,800
	Cash		3,800
	(To record the payment made to Company OT)

Table (5)

• Accounts payable is a liability account and it is decreased. Therefore, debit accounts payable with $3,800.
• Cash is an asset account and it is decreased. Therefore, credit cash account with $3,800.

December 31: To adjust the inventory records to record the physical count at the year-end.

Date	Accounts title and explanation	Debit ($)	Credit ($)
December 31	Cost of goods sold	1,710
	Inventory (1)		1,710
	(To adjust inventory to reflect the physical count)

Table (6)

• Cost of goods sold is an expense account and it decreases the stockholders’ equity. Therefore, debit cost of goods sold with $1,710.
• Inventory is an asset account and it is decreased. Therefore, credit inventory account with $1,710.

Working note:

Calculate the amount of adjustment for inventory shrinkage:

$\begin{array}{c}\text{Invenotry shrinkage}=\left(\begin{array}{l}\text{Inventory as per accounting records}-\\ \text{Inventory per physical count}\end{array}\right)\\ =\$183,790-\$182,080\\ =\$1,710\end{array}$ (1)

b.

To determine

Prepare the partial income statement to calculate the gross profit for the year.

Explanation of Solution

Gross margin (gross profit): Gross margin is the amount of revenue earned from goods sold over the costs incurred for the goods sold.

Income statement: The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.

Prepare the partial income statement to calculate the gross profit for the year:

Company CH
Partial Income Statement
For the year ended December 31
Particulars	Amount ($)	Amount ($)
Net sales	$1,024,900
Cost of goods sold (2)	$696,932
Gross profit		$327,968

Table (7)

Working note:

Calculate the cost of goods sold:

Particulars	Amount ($)
Cost of goods sold prior to adjustment at December 31	$695,222
Add: Shrinkage adjustment at December 31 (1)	$1,710
Cost of goods sold (adjusted balance)	$696,932

Table (8)

c.

To determine

Identify whether Company CH is able to pass its extra transportation costs on to its customers and find out whether the business appears to suffer or benefit financially from its remote location.

Explanation of Solution

Company CH seems to be able to in passing the extra transportation costs on its customers and it enjoys the significant financial benefit from its remote location. Following calculation will support the conclusion:

Calculate the difference in annual sales, gross profit and gross profit:

Particulars	Company CH (A)	Industry Average (B)	Difference $\left(\text{A}-\text{B}\right)$
Annual sales	$1,024,900	$1,000,000	$24,900
Gross profit	$327,968	$250,000 (3)	77,968
Gross profit rate	32% (4)	25%	7%

Table (9)

Working note:

Calculate the gross profit for industry average:

$\begin{array}{c}\text{Gross profit for industry average}=\text{Annual sales}\times \text{Gross profit rate}\\ =\$1,000,000\times 25\%\\ =\$250,000\end{array}$ (3)

Calculate the gross profit rate for Company CH:

$\begin{array}{c}\text{Gross profit rate for Company CH}=\frac{\text{Gross profit}}{\text{Annual sales}}\\ =\frac{\$327,968}{\$1,024,900}\times 100\\ =32\%\end{array}$ (4)

By calculating the annual sales, gross profit, and gross profit rate, it is identified that Company CH’s performance is higher than the industry average. The gross profit earned by Company CH is higher than the industry average, even if the cost of goods sold incurred by Company CH is higher than the industry, because of the additional transportation charges. The transportation charge made by Company CH is substantially higher than the other companies. Probably, the company should not charge higher prices in the competitive market. Hence, the remote location appears to insulate it from the completion and make the company to operate more profitable than the other company.