Chapter 6, Problem 29E

(Supplement 6A) Recording Purchases and Sales Using Perpetual and Periodic Inventory Systems

Kangaroo Jim Company reported beginning inventory of 100 units at a per unit cost of $25. It had the following purchase and sales transactions during the year:

Jan. 14	Sold 25 units at unit sales price of $45 on account.
Apr. 9	Purchased 15 additional units at a per unit cost of $25 on account.
Sept. 2	Sold 50 units at a sales price of $50 on account.
Dec. 31	Counted inventory and determined 40 units were Still on hand.

Required:

Record each transaction, assuming that Kangaroo Jim Company uses (a) a perpetual inventory system and (b) a periodic inventory system.

To determine

To Record: Each transaction by assuming Company KJ uses perpetual inventory system.

Answer to Problem 29E

Recording transactions by using Perpetual inventory system:

Date	Account Title & Explanation	Debit ($)	Credit($)
January 14	Accounts receivable	1,125
	Sales Revenue		1,125
	(To record sale of goods on account)
January 14	Cost of goods sold	625
	Inventory		625
	(To record cost of goods sold)
April 9	Inventory	375
	Accounts payable		375
	(To record purchase of additional units on account)
September 2	Accounts receivable	2,500
	Sales Revenue		2,500
	(To record sale of goods on account)
September 2	Cost of goods sold	1,250
	Inventory		1,250
	(To record cost of goods sold)
December 31	No year-end adjusting entry needed

Table (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.

Working notes:

On January 14:

• Accounts receivable is an asset and it increases. Hence, debit the accounts receivable by $1,125.
• Sales revenue is a component of stock holders’ equity and it increases. Hence, credit the sales revenue by $1,125.
• Cost of goods sold is an expense account which is a component of stockholders’ equity and it increases. Hence, debit cost of goods sold by $625.
• Inventory is an asset and it decreases. Hence, credit inventory by $625.

Calculation of the goods sold on account:

$\begin{array}{c}\text{Goods sold on account=No}\text{. of units sold}\times \text{Unit sales price}\\ \text{=25units}\times \text{\$45}\\ \text{=\$1,125}\end{array}$

Calculation of cost of goods sold:

$\begin{array}{c}\text{Cost of goods sold=No}\text{. of units sold}\times \text{Cost per unit}\\ \text{=25units}\times \text{\$25}\\ \text{=\$625}\end{array}$

On April 9:

• Inventory is an asset and it increases. Hence, debit the inventory by $375
• Accounts payable is a liability and it increases. Hence, credit the accounts payable by $375.

Calculation of purchase of additional units on account:

$\begin{array}{c}\text{Purchases=No}\text{.of units sold}\times \text{Cost per unit}\\ \text{=15units}\times \text{\$25}\\ \text{=\$375}\end{array}$

On September 2:

• Accounts receivable is an asset and it increases. Hence, debit the accounts receivable by $2,500.
• Sales revenue is a component of stock holders’ equity and it increases. Hence, credit the sales revenue by $2,500.
• Cost of goods sold is an expense account which is a component of stockholders’ equity and it increases. Hence, debit cost of goods sold by $1,250.
• Inventory is an asset and it decreases. Hence, credit inventory by $1,250.

Calculation of the goods sold on account:

$\begin{array}{c}\text{Goods sold on account=No}\text{. of units sold}\times \text{Unit sales price}\\ \text{=50units}\times \text{\$50}\\ \text{=\$2,500}\end{array}$

Calculation of cost of goods sold:

$\begin{array}{c}\text{Cost of goods sold=No}\text{. of units sold}\times \text{Cost per unit}\\ \text{=50units}\times \text{\$25}\\ \text{=\$1,250}\end{array}$

To determine

To Record: Each transaction by assuming Company KJ uses periodic inventory system.

Answer to Problem 29E

Recording transactions by using Periodic inventory system:

Date	Account Title & Explanation	Debit ($)	Credit($)
January 14	Accounts receivable	1,125
	Sales Revenue		1,125
	(To record sale of goods on account)
April 9	Purchases	375
	Accounts payable		375
	(To record purchase of additional units on account)
September 2	Accounts receivable	2,500
	Sales Revenue		2,500
	(To record sold goods on account)
December 31	Cost of goods sold(1)	2,875
	Purchases		375
	Inventory(2)		2,500
	(To record closing of beginning inventory with cost of goods sold)
	Inventory(3)	1,000
	Cost of goods sold		1,000
	(To record closing of ending inventory with cost of goods sold)

Table (2)

Explanation of Solution

Periodic Inventory System:

Periodic inventory system is a system in which the inventory is updated in the accounting records on a periodic basis such as at the end of each month, quarter or year. In other words, it is an accounting method which is used to determine the amount of inventory at the end of each accounting period.

Working notes:

On January 14:

• Accounts receivable is an asset and it increases. Hence, debit the accounts receivable by $1,125.
• Sales revenue is a component of stock holders’ equity and it increases. Hence, credit the sales revenue by $1,125.

Calculation of the goods sold on account:

$\begin{array}{c}\text{Goods sold on account=No}\text{. of units sold}\times \text{Unit sales price}\\ \text{=25units}\times \text{\$45}\\ \text{=\$1,125}\end{array}$

On April 9:

• Purchase is an expense account which is a component of stockholders’ equity and it increases. Hence, debit the purchases by $375
• Accounts payable is a liability and it increases. Hence, credit the accounts payable by $375.

Calculation of purchase of additional units on account:

$\begin{array}{c}\text{Purchases=No}\text{.of units sold}\times \text{Cost per unit}\\ \text{=15units}\times \text{\$25}\\ \text{=\$375}\end{array}$

On September 2:

• Accounts receivable is an asset and it increases. Hence, debit the accounts receivable by $2,500.
• Sales revenue is a component of stock holders’ equity and it increases. Hence, credit the sales revenue by $2,500.

Calculation of the goods sold on account:

$\begin{array}{c}\text{Goods sold on account=No}\text{. of units sold}\times \text{Unit sales price}\\ \text{=50units}\times \text{\$50}\\ \text{=\$2,500}\end{array}$

On December 31:

• Cost of goods sold is an expense account which is a component of stockholders’ equity and it increases. Hence, debit cost of goods sold by $2,875.
• Purchase is an expense account which is a component of stockholders’ equity it increases. Hence, credit the purchases by $375
• Inventory is an asset and it decreases. Hence, credit inventory by $2,500.
• Inventory is an asset and it increases. Hence, debit inventory by $1,000.
• Cost of goods sold is an expense account which is a component of stockholders’ equity and it increases. Hence, debit cost of goods sold by $1,000.

Calculation of inventory:

$\begin{array}{c}\text{Inventory=No}\text{.of units sold}\times \text{Cost per unit}\\ \text{=15units}\times \text{\$25}\\ \text{=\$375}\end{array}$

Calculation of cost of goods sold:

Particulars	Amount ($)	Amount ($)
Beginning inventory (2)	2,500
Add: Purchases	375
Cost of goods available for sale	2,875
Less: Ending inventory (3)	1,000
Cost of goods sold		1,875

Table (3)

(1)

Calculation of beginning Inventory:

$\begin{array}{c}\text{Inventory=Beginning inventory}\times \text{Cost per unit}\\ \text{=100units}\times \text{\$25}\\ =\$2,500\end{array}$ (2)

Calculation of ending Inventory:

$\begin{array}{c}\text{Inventory=Ending inventory}\times \text{Cost per unit}\\ \text{=40units}\times \text{\$25}\\ =\$1,000\end{array}$ (3)