Chapter 6, Problem 6.1CACR

(a)

To determine

Periodic Inventory System: It 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.

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.

To Record: The journal entries for Company W using perpetual inventory method.

Explanation of Solution

Record the transaction for the month December, 2017.

Date	Account Title and Explanation	Post Ref.	Debit($)	Credit($)
December 3, 2017	Inventory (A+)		2,880 (1)
	Accounts Payable (L+)			2,880
	(To record the purchase of inventory on account)
December 5, 2017	Accounts Receivable(A+)		3,960 (2)
	Sales Revenue (E+)			3,960
	(To record the revenue rendered on account)
	Cost of goods sold (E–)		2,808 (3)
	Inventory (A–)			2,808
	(To record a credit sale and the cost of credit sale)
December 7, 2017	Sales Return and Allowances (E–)		180
	Accounts Receivables (A–)			180
	(To record returned of inventory)
	Inventory (A+)		144
	Cost of goods sold (E+)			144
	(To record a credit sale and the cost of credit sale)
December 17, 2017	Inventory (A+)		1,760 (4)
	Cash (A–)			1,760
	(To record the purchase of inventory by cash)
December 22, 2017	Accounts Receivable(A+)		1,900
	Sales Revenue (E+)			1,900 (5)
	(To record the revenue rendered on account)
	Cost of goods sold (E–)		1,440 (6)
	Inventory (A–)			1,440
	(To record a credit sale and the cost of credit sale)
December 31, 2017	Salaries and Wages Expense (E –)		400
	Salaries and Wages Payable (L+)			400
	(To record the amount of accrued salaries for the month.)
December 31, 2017	Depreciation Expense (E–)		200
	Accumulated Depreciation (A–)			200
	(To record the amount of depreciation for the month)
December 31, 2017	Income tax expense (E–)		215	215
	Income tax payable (L+)
	(To record income tax expense for the year)

Table (1)

Working Notes:

Calculate the amount of inventory on December 3.

$\begin{array}{c}\text{Inventory}=\text{Purchased unit}\times \text{Cost per unit}\\ =\text{\$4,000}\times \text{.72}\\ =\text{\$2,880}\end{array}$ (1)

Calculate the amount of accounts receivable on December 5.

$\begin{array}{c}\text{Accounts receivable}=\text{Sold units of inventory}\times \text{Cost per unit}\\ =\text{\$4,400}\times \text{.90}\\ =\text{\$3,960}\end{array}$ (2)

Calculate the amount of cost of goods sold on December 5.

$\begin{array}{c}\text{Cost of goods sold}=\left(\begin{array}{l}\text{Sold unit}\times \text{Cost per unit}+\\ \text{Sold unit}\times \text{Cost per unit}\end{array}\right)\\ =\left(\$3,000\times .60+\$1,400\times .72\right)\\ =\$1,800+\$1,008\\ =\$2,808\end{array}$ (3)

Calculate the amount of purchase of inventory on December 17.

$\begin{array}{c}\text{Purchase of inventory}=\text{Purchased inventory}\times \text{Cost per unit}\\ =\text{\$2,200}\times \text{.80}\\ =\text{\$1,760}\end{array}$ (4)

Calculate the amount of sales revenue on December 22.

$\begin{array}{c}\text{Sales revenue }=\text{ Sold units}\times \text{Cost per unit}\\ =\text{\$2,000}\times \text{.95}\\ =\text{\$1,900}\end{array}$ (5)

Calculate the amount of cost of goods sold on December 22.

$\begin{array}{c}\text{Cost of goods sold}=\left(\text{Sold unit}\times \text{Cost per unit}\right)\\ =\$2,000\times .72\\ =\$1,440\end{array}$ (6)

(b)

To determine

T Accounts: T- accounts are prepared for all the business transactions. First, journal entries are passed and then transferred to the respective ledger accounts where, they are recorded and summarized in either side of the ‘T’ format. It is divided into two parts by a vertical line, that is, the left side and the right side. The left side of the T-account is known as the debit side and the right side of the T-account is known as the credit side. The account name appears on the top of the T-account.

To Prepare: The ledger account for the above transactions recorded.

Explanation of Solution

Post the December transactions to the following T-accounts.

Cash Account

Date	Particulars	Debit	Date	Particulars	Credit
		($)			($)
December	Opening balance	4,800	December	Inventory	1,760
1			17
December	Ending balance	3,040
31

Table (2)

Inventory Account

Date	Particulars	Debit	Date	Particulars	Credit
		($)			($)
December	Opening balance	1,800	December	Cost of goods sold	2,808
1			5
December	Accounts payable	2,880	December	Cost of goods sold	1,440
3			22
December	Cost of goods sold	144
7
December	Cash	1,760
17
December	Ending balance	2,336
31

Table (3)

Equipment Account

Date	Particulars	Debit	Date	Particulars	Credit
		($)			($)
December	Ending balance	21,000
31

Table (4)

Accumulated Depreciation

Date	Particulars	Debit	Date	Particulars	Credit
		($)			($)
			December	Opening balance	1,500
			1
			December	Depreciation expense	200
			31
			December	Ending balance	1,700
			31

Table (5)

Accounts Payable Account

Date	Particulars	Debit	Date	Particulars	Credit
		($)			($)
			December	Opening balance	3,000
			1
			December	Inventory	2,880
			5
			December	Ending balance	5,880
			31

Table (6)

Salaries and Wage Payable Account

Date	Particulars	Debit	Date	Particulars	Credit
		($)			($)
			December	Opening balance	400
			1
			December	Ending balance	400
			31

Table (7)

Cost of Goods Sold Account

Date	Particulars	Debit	Date	Particulars	Credit
		($)			($)
December	Inventory	2,808	December	Inventory	144
5			7
December	Inventory	1,440
22
December	Ending balance	4,104
31

Table (8)

Depreciation Account

Date	Particulars	Debit	Date	Particulars	Credit
		($)			($)
December	Opening balance	200
1
December	Ending balance	200
31

Table (9)

Common Stock Account

Date	Particulars	Debit	Date	Particulars	Credit
		($)			($)
			December	Opening balance	10,000
			1
			December	Ending balance	10,000
			31

Table (10)

Retained Earnings Account

Date	Particulars	Debit	Date	Particulars	Credit
		($)			($)
			December	Opening balance	17,000
			1
			December	Ending balance	17,000
			31

Table (11)

Sales Revenue Account

Date	Particulars	Debit	Date	Particulars	Credit
		($)			($)
			December	Accounts receivable	3,960
			5
			December	Accounts receivable	1,900
			22
			December	Ending balance	5,860
			31

Table (12)

Salaries and Wage Expense Account

Date	Particulars	Debit	Date	Particulars	Credit
		($)			($)
December	Salaries and wage payable	400
31
December	Ending balance	400
31

Table (13)

Sales Return and Allowances Account

Date	Particulars	Debit	Date	Particulars	Credit
		($)			($)
December	Opening balance	180
1
December	Ending balance	180
31

Table(14)

Accounts Receivable Account

Date	Particulars	Debit	Date	Particulars	Credit
		($)			($)
December	Opening balance	3,900	December	Sales return and allowances	180
1			7
December	Sales revenue	3,960
5
December	Sales revenue	1,900
22
December	Ending balance	9,580
31

Table (15)

Income Tax Expense

Date	Particulars	Debit	Date	Particulars	Credit
		($)			($)
December	Income tax  payable	215
31
December	Ending balance	215
31

Table (16)

Income Tax Payable Account

Date	Particulars	Debit	Date	Particulars	Credit
		($)			($)
			December	Opening balance	215
			1
			December	Ending balance	215
			31

Table (17)

(c)

To determine

Trial balance: This is a statement prepared to show all the year-end account balances of a business. The balances are shown in separate columns as debit and credit. Trial balance is made to check whether books of accounts of the business are arithmetically accurate.

To Prepare: The adjusted trial balance at December 31, 2017.

Explanation of Solution

Prepare the adjusted trial balance.

W Company
Adjusted trial balance
December 31, 2017
Particulars	Debit	Credit
	($)	($)
Cash	3,040
Inventory	2,336
Accounts receivable	9,580
Equipment	21,000
Accumulated depreciation		1,700
on equipment
Accounts payable		5,880
Salaries and wages payable		400
Income tax payable		215
Common stock		10,000
Retained earnings		17,000
Sales revenue		5,860
Sales returns and allowances	180
Salaries and wages expense	400
Income tax expenses	215
Cost of goods sold	4,104
Depreciation expense	200
Total	$41,055	$41,055

Table (18)

(d)

To determine

The income statement: This is a financial statement that shows the net income earned, or net loss suffered by a company, through reporting all the revenues earned, and expenses incurred, by the company over a specific period of time. An income statement is also known as an operations statement, an earnings statement, a revenue statement, or a profit and loss statement. The net income is the excess of revenue over expenses.

Prepare the income statement of W Company.

Classified Balance Sheet: This is a financial statement where the assets, liabilities, and stockholders’ equity are organized and reported as different groups, and sub-groups on the basis of the nature of the classification made by a company at a particular point of time. It reveals the financial health of a company. Thus, this statement is also called as the Statement of Financial Position. It helps the users to know about the creditworthiness of a company as to whether the company has enough assets to pay off its liabilities.

To Prepare: The income statement for the month ended December 31, 2017 and a classified balance sheet at December 31, 2017.

Explanation of Solution

W Company
Income statement
For the month ended December 31, 2017
Particulars	Amount	Amount
	($)	($)
Sales revenue	5,860
Less: Sales return and allowances	(180)
Net sales		5,680
Less: Cost of goods sold		(4,104)
Gross profit		1,576
Operating expenses:
Salaries and wages expense	400
Depreciation expense	200
Income tax expense	215	(815)
Net income		$761

Table (19)

Prepare a classified balance sheet of W Company as on December 31, 2017.

W Company
Classified balance sheet
December 31, 2017
Particulars	Amount	Amount
	($)	($)
Assets:
Current assets:
Cash	3,040
Inventory	2,336
Accounts receivable	9,580
Total current assets		14,956
Property, plant, and equipment:
Equipment	21,000
Less: Accumulated depreciation	(1,700)	19,300
Total assets		$34,256
Liabilities and stockholder’s equity:
Current liabilities:
Accounts payable	5,880
Salaries and wage payable	400
Income tax payable	215
Total current liabilities		6,495
Stockholder’s equity
Common stock	10,000
Retained earnings	17,761 (7)	27,761
Total liabilities and stockholder’s equity		$34,256

Table (20)

Working Note:

Calculate the amount of retained earnings.

$\begin{array}{c}\text{Retained earings}=\text{Retained earings}\text{balance}+\text{Net income}\\ =\text{\$17,000}+\text{\$761}\\ =\text{\$17,761}\end{array}$ (7)

Conclusion

Therefore, the income statement indicates a net income of $761 for the month ending December 31, 2017.

Therefore, the balance sheet of W Company as on December 31, 2017 indicates equal amounts of assets and liabilities of $34,256.

(e)

To determine

To Compute: The ending inventory and cost of goods sold under FIFO method.

Explanation of Solution

Calculate the ending inventory and cost of goods sold under FIFO method.

Step 1: Calculate cost of goods available for sale.

FIFO Method
Particulars	Units	Unit Cost     ($)	Cost of Goods Available for Sales
			($)
Beginning Inventory	3,000	0.6	1,800
Add: Purchase on	4,000	0.72	2,880
December 3
Add: Purchase on	2,200	0.8	1,760
December 17
Total	9,200		$6,440

Table (21)

Step 2: Calculate ending inventory under FIFO method.

FIFO Method
Date	Units	Rates	Amount
		($)	($)
Purchase on	2,200	0.8	1,760
December 17
Add: Purchase on	800 (8)	0.72	576
December 3
Total ending inventory	3,000		$2,336

Table (22)

Working Note:

Calculate an amount of purchases on December 3.

$\begin{array}{c}\text{Purchases on December 3 = }\left[\begin{array}{l}\left(\begin{array}{l}\text{Total units of purchases}-\\ \text{Sold unit on December 3 +}\\ \text{Returned inventory units}-\\ \text{Sold unit on December}22\end{array}\right)\\ -\text{Purchased unit on December}17\end{array}\right]\\ =\left[\left(\begin{array}{l}9,200-4,400+200\\ -2,000\end{array}\right)-2,200\right]\\ =3,000-2,200\\ =800\end{array}$ (8)

Calculate cost of goods sold under FIFO method.

Particulars	Amount
	($)
Cost of goods available for sale	6,440
Less: Ending inventory	(2,336)
Cost of goods sold	$4,104

Table (23)

Conclusion

Therefore, the ending inventory under FIFO method for 3,000 units is $2,336.

Therefore, the cost of goods sold under FIFO method is $4,104.

(f)

To determine

To Compute: The ending inventory and cost of goods sold under LIFO method.

Explanation of Solution

Compute ending inventory under LIFO method.

Date	Units	Rates	Amount
		($)	($)
Purchase on	3,000	0.72	2,160
December 1
Total ending inventory	3,000		$2,160

Table (24)

Compute cost of goods sold under LIFO method.

Particulars	Amount
	($)
Cost of goods available for sale	6,440
Less: Ending inventory	(2,160)
Cost of goods sold	$4,280

Table (25)

Conclusion

Therefore, the ending inventory under LIFO method for 3,000 units is $2,160.

Therefore, the cost of goods sold under LIFO method is $4,280