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Record transactions using a perpetual system, prepare a partial income statement, and adjust for the lower of cost and net realizable value (LO6–2, 6–3, 6–4, 6–5, 6–6)
At the beginning of October, Bowser Co.’s inventory consists of 50 units with a cost per unit of $50. The following transactions occur during the month of October.
October 4 Purchase 130 units of inventory on account from Waluigi Co. for $50 per unit, terms 2/10, n/30.
October 5 Pay cash for freight charges related to the October 4 purchase, $600.
October 9 Return 10 defective units from the October 4 purchase and receive credit.
October 12 Pay Waluigi Co. in full.
October 15 Sell 160 units of inventory to customers on account, $12,800. (Hint: The cost of units sold from the October 4 purchase includes $50 unit cost plus $5 per unit for freight less $1 per unit for the purchase discount, or $54 per unit.)
October 19 Receive full payment from customers related to the sale on October 15.
October 20 Purchase 100 units of inventory from Waluigi Co. for $70 per unit, terms 2/10, n/30.
October 22 Sell 100 units of inventory to customers for cash. $8,000.
Required:
1. Assuming that Bowser Co. uses a FIFO perpetual inventory system to maintain its inventory records, record the transactions.
2. Suppose by the end of October that the remaining inventory is estimated to have a net realizable value per unit of $35. Record any necessary adjustment for lower of cost and net realizable value.
3. Prepare the top section of the multiple-step income statement through gross profit for the month of October after the adjustment for lower of cost and net realizable value.
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To Record: The transactions of Company B, assuming that it uses a FIFO perpetual inventory system to maintain its inventory records.
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.
First-in First-Out method (FIFO): Under FIFO method the cost of first acquired items is assigned to sales first. The value of the closing stock includes the cost of recently acquired item.
October 4: Purchased 130 units at the rate of $50 each on account:
Date | Account Title and Explanation |
Post Ref. |
Debit ($) |
Credit ($) |
October 4 | Inventory | 6,500 | ||
Accounts Payable | 6,500 | |||
(To record the purchase of inventories on account) |
Table (1)
- Inventory is an asset and increased by $6,500. Therefore, debit the inventory account with $6,500.
- Accounts payable is a liability and increased by $6,500. Therefore, credit the accounts payable account with $6,500.
October 5: Paid a freight charge of $600:
Date | Account Title and Explanation |
Post Ref. |
Debit ($) |
Credit ($) |
October 5 | Inventory | 600 | ||
Cash | 600 | |||
(To record the payment of freight charge) |
Table (2)
- Inventory is an asset and increased by $600. Therefore, debit the merchandised inventory account with $600.
- Cash is an asset and decreased by $600. Therefore, credit the cash account with $600.
October 9: Inventories 10 units returned to suppliers:
Date | Account Title and Explanation |
Post Ref. |
Debit ($) |
Credit ($) |
October 9 | Accounts Payable | 500 | ||
Inventory | 500 | |||
(To record the purchase return to the supplier) |
Table (3)
Working Note:
- Accounts Payable is liability and decreased by $500. Therefore, debit the accounts payable account with $500.
- Inventory is an asset and decreased by $500. Therefore, credit the merchandised inventory account with $500.
October 12: Company D paid full amount due:
Date | Account Title and Explanation |
Post Ref. |
Debit ($) |
Credit ($) |
October 12 | Accounts Payable | 6,000 | ||
Inventory | 120 | |||
Cash | 5,880 | |||
(To record the payment made to the supplier) |
Table (4)
Working Note:
Compute the amount of purchase discount:
Compute the amount due to the supplier:
Compute the accounts payable:
Invoice price = $6,500 (1)
Purchase return = $500 (2)
Compute the total amount due to the suppliers:
Accounts receivables = $12,800(4)
Purchase discount = $128 (3)
- Accounts Payable is a liability and decreased by $6,000. Therefore, debit the accounts payable account with $6,000.
- Merchandised inventory is an asset and decreased by $120. Therefore, credit the merchandised inventory account with $120.
- Cash is an asset and decreased by $5,880. Therefore, credit cash account with $5,880.
October 15: Sold 160 units on account:
Date | Account Title and Explanation |
Post Ref. |
Debit ($) |
Credit ($) |
October 15 | Accounts Receivable | 12,800 | ||
Sales Revenue | 12,800 | |||
(To record the sale of inventory) |
Table (5)
- Accounts Receivable is an asset account and increased by $12,800. Therefore, debit the accounts Receivable account with $12,800.
- Sales revenue is an equity account and increased by $12,800. Therefore, credit the sales revenue account with $12,800.
Date | Account Title and Explanation |
Post Ref. |
Debit ($) |
Credit ($) |
October 15 | Cost of Goods Sold | 8,440 | ||
Inventory | 8,440 | |||
(To record the cost of goods sold) |
Table (6)
Working Note:
Cost of goods sold:
- Cost of goods sold is an expense and has increased, which has decreased the equity by $8,440. Therefore, debit cost of goods sold account with $8,440.
- Inventory is an asset and decreased by $8,440. Therefore, credit the inventory account with $8,440.
October 19: Received full payment from customers on account:
Date | Account Title and Explanation |
Post Ref. |
Debit ($) |
Credit ($) |
October 19 | Cash | 12,800 | ||
Accounts receivable | 12,800 | |||
(To record the full payment received from the customers on account) |
Table (7)
- Cash is an asset account and it is increased by $12,800. Therefore, debit the cash account with $12,800.
- Accounts receivable is an asset account and it is decreased by $12,800. Therefore, credit the accounts receivable account with $12,800.
October 20: Purchased 100 units at the rate of $70 each on account:
Date | Account Title and Explanation |
Post Ref. |
Debit ($) |
Credit ($) |
October 20 | Inventory | 7,000 | ||
Accounts Payable | 7,000 | |||
(To record the purchase of inventories on account) |
Table (8)
- Inventory is an asset and increased by $7,000. Therefore, debit the inventory account with $7,000.
- Accounts payable is a liability and increased by $7,000. Therefore, credit the accounts payable account with $7,000.
October 22: Sold 160 units:
Date | Account Title and Explanation |
Post Ref. |
Debit ($) |
Credit ($) |
October 22 | Cash | 8,000 | ||
Sales Revenue | 8,000 | |||
(To record the sale of inventory) |
Table (9)
- Cash is an asset account and increased by $8,000. Therefore, debit the cash account with $8,000.
- Sales revenue is an equity account and increased by $8,000. Therefore, credit the sales revenue account with $8,000.
Date | Account Title and Explanation |
Post Ref. |
Debit ($) |
Credit ($) |
October 22 | Cost of Goods Sold | 6,840 | ||
Inventory | 6,840 | |||
(To record the cost of goods sold) |
Table (10)
Working Note:
Cost of goods sold:
- Cost of goods sold is an expense and has increased, which has decreased the equity by $6,840. Therefore, debit cost of goods sold account with $6,840.
- Inventory is an asset and decreased by $6,840. Therefore, credit the inventory account with $6,840.
2.
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To Record: Any necessary adjustment for lower of cost and net realizable value.
Explanation of Solution
Record the necessary adjustment for lower of cost and net realizable value.
Date | Account Title and Explanation |
Post Ref. |
Debit ($) |
Credit ($) |
October 31 | Cost of Goods Sold | 350 | ||
Inventory | 350 | |||
(To record the adjustment for lower of cost and net realizable value) |
Table (11)
- Cost of goods sold is an expense and has increased, which has decreased the equity by $6,840. Therefore, debit cost of goods sold account with $6,840.
- Inventory is an asset and decreased by $6,840. Therefore, credit the inventory account with $6,840.
The ending inventory is adjusted at the cost of the inventory or net realizable value whichever is less. The cost of the FIFO ending inventory is
3.
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To Prepare: The top section of the multiple-step income statement through gross profit for the month of October after the adjustment for lower of cost and net realizable value.
Explanation of Solution
Prepare the top section of the multiple-step income statement through gross profit for the month of October after the adjustment for lower of cost and net realizable value.
Company B | |
Multi-step Income Statement (Partial) | |
For the month of October | |
Particulars | $ |
Net sales | 20,800 |
Less: Cost of goods sold | 15,630 |
Gross Profit | 5,170 |
Table (12)
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