Chapter 6, Problem 1PB

a.

To determine

Prepare the journal entry to record the transactions and events in the accounting records of Company BOL 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:

April 15: To record the sale of lumber on account to Construction HH.

Date	Accounts title and explanation	Debit ($)	Credit ($)
April 15	Accounts receivable(Construction HH)	19,700
	Sales		19,700
	(To record the sale of lumber on account to Construction HH)

Table (1)

• Accounts receivable is an asset account and it is increased. Therefore, debit accounts receivable with $19,700.
• Sale is a revenue account and it increases the stockholders’ equity account. Therefore, credit sales account with $19,700.

April 15: To record the cost of goods sold.

Date	Accounts title and explanation	Debit ($)	Credit ($)
April 15	Cost of goods sold	10,300
	Inventory		10,300
	(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 $10,300.
• Inventory is an asset account and it is decreased. Therefore, credit inventory with $10,300.

April 19: To record the purchase of merchandise on credit from Company LHP.

Date	Accounts title and explanation	Debit ($)	Credit ($)
April 19	Inventory	3,700
	Accounts payable (Company LHP)		3,700
	(To record the purchase of merchandise on credit)

Table (3)

• Inventory is an asset account and it is increased. Therefore, debit inventory account with $3,700.
• Accounts payable is a liability account and it is increased. Therefore, credit accounts payable with $3,700.

May 10: To record the collection of cash from Construction HH.

Date	Accounts title and explanation	Debit ($)	Credit ($)
May 10	Cash	19,700
	Accounts receivable (Construction HH)		19,700
	(To record the collection of cash from Construction HH)

Table (4)

• Cash is an asset account and it is increased. Therefore, debit cash account with $19,700.
• Accounts receivable is an asset account and it is decreased. Therefore, credit accounts receivable account with $19,700.

May 19: To record the payment made to Company LHP.

Date	Accounts title and explanation	Debit ($)	Credit ($)
May 19	Accounts payable (Company LHP)	3,700
	Cash		3,700
	(To record the payment made to Company LHP)

Table (5)

• Accounts payable is a liability account and it is decreased. Therefore, debit accounts payable with $3,700.
• Cash is an asset account and it is decreased. Therefore, credit cash account with $3,700.

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	2,500
	Inventory (1)		2,500
	(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 $2,500.
• Inventory is an asset account and it is decreased. Therefore, credit inventory account with $2,500.

Working note:

Calculate the amount of adjustment for inventory shrinkage:

$\begin{array}{c}\text{Invenotry shrinkage}=\left(\begin{array}{l}\text{Inventory as per accounting records}-\\ \text{Inventory per physical count}\end{array}\right)\\ =\$116,500-\$114,000\\ =\$2,500\end{array}$ (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 BOL
Partial Income Statement
For the year ended December 31
Particulars	Amount ($)	Amount ($)
Net sales	$1,422,000
Cost of goods sold (2)	$723,500
Gross profit		$698,500

Table (7)

Working note:

Calculate the cost of goods sold:

Particulars	Amount ($)
Cost of goods sold prior to adjustment at December 31	$721,000
Add: Shrinkage adjustment at December 31 (1)	$2,500
Cost of goods sold (adjusted balance)	$723,500

Table (8)

c.

To determine

Identify whether Company BOL 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 BOL 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 BOL (A)	Industry Average (B)	Difference $\left(\text{A}-\text{B}\right)$
Annual sales	$1,422,000	$1,000,000	$422,000
Gross profit	$698,500	$220,000 (3)	$478,500
Gross profit rate	49.1% (4)	22%	27.1%

Table (9)

Working note:

Calculate the gross profit for industry average:

$\begin{array}{c}\text{Gross profit for industry average}=\text{Annual sales}\times \text{Gross profit rate}\\ =\$1,000,000\times 22\%\\ =\$220,000\end{array}$ (3)

Calculate the gross profit rate for Company BOL:

$\begin{array}{c}\text{Gross profit rate for Company BOL}=\frac{\text{Gross profit}}{\text{Annual sales}}\\ =\frac{\$698,500}{\$1,422,000}\times 100\\ =49.1\%\end{array}$ (4)

By calculating the annual sales, gross profit, and gross profit rate, it is identified that Company BOL’s performance is higher than the industry average. The gross profit earned by Company BOL is higher than the industry average, even if the cost of goods sold incurred by Company BOL is higher than the industry, because of the additional transportation. The transportation charge made by Company BOL 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.