
Concept explainers
1.
Record each transactions of Company BBF, assuming a FIFO perpetual inventory system.
1.

Explanation of Solution
Perpetual Inventory System:
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.
Record the
Date | Account Title and Explanation |
Post Ref. |
Debit ($) |
Credit ($) |
January 3 | Merchandised Inventory | 126,000 | ||
Accounts Payable | 126,000 | |||
(To record the purchase of inventories on account) | ||||
January 8 | Merchandised Inventory | 143,000 | ||
Accounts Payable | 143,000 | |||
(To record the purchase of inventories on account) | ||||
January 12 | Merchandised Inventory | 161,000 | ||
Accounts Payable | 161,000 | |||
(To record the purchase of inventories on account) | ||||
January 15 | Accounts Payable | 11,500 | ||
Merchandised Inventory (1) | 11,500 | |||
(To record the return of defective inventories) | ||||
January 19 | 600,000 | |||
Sales Revenue | 600,000 | |||
(To record the sales on account) | ||||
January 19 | Cost of Goods SoldTable (2) | 437,000 | ||
Merchandised Inventory | 437,000 | |||
(To record the cost of goods sold) | ||||
January 22 | Cash | 580,000 | ||
Accounts receivable | 580,000 | |||
(To record the cash received on account) | ||||
January 24 | Accounts Payable | 410,000 | ||
Cash | 410,000 | |||
(To record the payment of inventory supplies on account) | ||||
January 27 | Allowance for uncollectible accounts | 2,500 | ||
Accounts receivable | 2,500 | |||
(To record the write off accounts receivable as uncollectible) | ||||
January 31 | Salaries expense | 128,000 | ||
Cash | 128,000 | |||
(To record the payment made to salaries) |
Table (1)
Working note:
Determine the amount of defective inventory:
(1)
Determine the amount of cost of goods sold:
Particulars | Number of units | Rate per unit ($) | Total cost ($) |
Beginning balance | 300 | 100 | 30,000 |
Purchase on January 3 | 1,200 | 105 | 126,000 |
Purchase on January 8 | 1,300 | 110 | 143,000 |
Purchase on January 12 | 1,200 | 115 | 138,000 |
Cost of goods sold | 437,000 |
Table (2)
2.
Record the
2.

Explanation of Solution
Adjusting entries:
Adjusting entries refers to the entries that are made at the end of an accounting period in accordance with revenue recognition principle, and expenses recognition principle. The purpose of adjusting entries is to adjust the revenue, and the expenses during the period in which they actually occurs.
Date | Account Title and Explanation |
Post Ref. |
Debit ($) |
Credit ($) |
(a) | Cost of Goods Sold | 1,500 | ||
January 31 | Merchandised Inventory(2) | 1,500 | ||
(To record the adjustment made in the cost of goods sold) | ||||
(b) | 3,000 | |||
January 31 | Allowance for uncollectible accounts(3) | 3,000 | ||
(To record the adjustment in uncollectible accounts) | ||||
(c) | Interest expense(6) | 200 | ||
January 31 | Interest Payable | 200 | ||
To record the accrued interest expense) | ||||
(d) | Income tax Expense | 12,300 | ||
January 31 | Income tax Payable | 12,300 | ||
(To record the accrued income taxes) |
Table (3)
Working notes:
Determine the amount of merchandise inventory:
(2)
Determine the allowance for uncollectible accounts:
(3)
Determine the amount of uncollectible accounts:
(4)
Determine the amount of remaining receivables:
(5)
Determine the amount of interest expenses:
(6)
3.
Prepare an adjusted trail balance as of January 31, 2021.
3.

Explanation of Solution
Adjusted
Adjusted trial balance is a summary of all the ledger accounts, and it contains the balances of all the accounts after the adjustment entries are journalized, and posted.
An adjusted trail balance as of January 31, 2021 is prepared as follows:
Company BBF | ||
Adjusted Trial Balance | ||
January 31, 2021 | ||
Particulars | Debit ($) | Credit ($) |
Cash(7) | $63,900 | |
Accounts Receivable(8) | 54,000 | |
Inventory(9) | 10,000 | |
Land | 61,600 | |
Allowance for Uncollectible Accounts(11) | $3,600 | |
Accounts Payable(10) | 40,900 | |
Interest Payable | 200 | |
Income Tax Payable | 12,300 | |
Notes Payable | 30,000 | |
Common Stock | 56,000 | |
28,500 | ||
Sales Revenue | 600,000 | |
Cost of Goods Sold | 438,500 | |
Salaries Expense | 128,000 | |
Bad Debt Expense | 3,000 | |
Interest Expense | 200 | |
Income Tax Expense | 12,300 | |
Totals | $771,500 | $771,500 |
Table (4)
Working note:
Determine the amount of cash:
(7)
Determine the amount of accounts receivable:
(8)
Determine the amount of inventory:
(9)
Determine the amount of accounts Payable:
(10)
Determine the amount of uncollectible accounts:
(11)
The debit column and credit column of the unadjusted trial balance are agreed, both having balance of $771,500.
4.
Prepare a multiple-step income statement for the period ended January 31, 2021.
4.

Explanation of Solution
A multiple-step income statement for the period ended January 31, 2021 is prepared as follows:
Income Statement (Multiple-Step) | ||
For the year ended January 31, 2021 | ||
Sales revenue | $600,000 | |
Cost of goods sold | 438,500 | |
Gross profit | $161,500 | |
Salaries expense | 128,000 | |
Bad debt expense | 3,000 | |
Total operating expenses | 131,000 | |
Operating income | 30,500 | |
Interest expense | 200 | |
Income before taxes | 30,300 | |
Income tax expense | 12,300 | |
Net income | $18,000 |
Table (5)
Therefore, a multiple-step income statement shows a net income of $18,000.
5.
Prepare a classified
5.

Explanation of Solution
Classified balance sheet:
This is the financial statement of a company which shows the grouping of similar assets and liabilities under subheadings.
A classified balance sheet as of January 31, 2021 is prepared as follows:
Company BBF | ||||
Classified Balance Sheet | ||||
January 31, 2021 | ||||
Assets | Liabilities | |||
Cash | $63,900 | Accounts payable | $40,900 | |
Accounts receivable | 54,000 | Interest payable | 200 | |
Less: Allowance | (3,600) | 50,400 | Income tax payable | 12,300 |
Inventory | 10,000 | Total current liabilities | 53,400 | |
Total current assets | 124,300 | Notes payable | 30,000 | |
Total liabilities | 83,400 | |||
Land | 61,600 | |||
Common stock | 56,000 | |||
Retained earnings | 46,500 | |||
Total stockholders’ equity | 102,500 | |||
Total assets | $185,900 | Total liabilities and stockholders’ equity | $185,900 |
Table (6)
6.
Record the closing entries.
6.

Explanation of Solution
Closing entries:
Closing entries are recorded in order to close the temporary accounts such as incomes and expenses by transferring them to the permanent accounts. It is passed at the end of the accounting period, to transfer the final balance.
Closing entry for revenue and expense accounts:
Date | Accounts title and Explanation |
Debit ($) |
Credit ($) |
January 31, 2021 | Service Revenue | 600,000 | |
Retained earnings | 600,0000 | ||
(To close the revenues account) | |||
Retained earnings | 582,000 | ||
Cost of goods sold | 483,500 | ||
Salaries expenses | 128,000 | ||
Bad debt expense | 3,000 | ||
Interest expense | 200 | ||
Income tax expense | 12,300 | ||
(To close the expenses account) |
Table (7)
7. a.
Calculate the inventory turnover ratio.
7. a.

Answer to Problem 21E
The inventory turnover is 21.9 Times.
Explanation of Solution
Inventory turnover ratio: Inventory turnover ratio is used to determine the number of times inventory used or sold during the particular accounting period. The formula to calculate the inventory turnover ratio is as follows:
Working note:
The inventory turnover ratio is calculated as follows:
Calculate the average inventory:
The inventory turnover ratio is calculated by dividing cost of goods sold by average inventory during the period. The average inventory is calculating by dividing beginning inventory and ending inventory by 2. The inventory turnover ratio is an important measure as to how efficient is the management is good at managing inventory and achieving sales from it.
7. b.
Calculate the gross profit ratio.
7. b.

Answer to Problem 21E
The gross profit ratio is 26.9%.
Explanation of Solution
Gross profit method
This method is use the estimated gross profit for the period to evaluate and ascertain the ending inventory for the period. The gross profit for the period is calculated from the preceding year, which is adjusted for any current period changes in the sales and cost price of the inventory.
Working note:
The gross profit ratio is calculated as follows:
7. c.
State whether the company sells a higher volume of less expensive itemor a lower volume of more expensive items.
7. c.

Explanation of Solution
From the inventory turnover ratio and the gross profit ratio, it is clear that the Company BB appears to sell a higher volume of less expensive. This is because, the lower price item sell more than high priced items.
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