Chapter 6, Problem 6CP

(Supplement A) Recording Inventory Transactions Using Periodic and Perpetual Inventory Systems

Frigid Supplies reported beginning inventory of 200 units, for a total cost of $2.000. The company had the following transactions during the month:

Jan. 3	Sold 20 units on account at a selling price of $ 15 per unit.
6	Bought 30 units on account at a cost of $10 per unit.
16	Sold 30 units on account at a selling price of $15 per unit.
19	Sold 20 units on account at a selling price of $20 per unit.
26	Bought 10 units on account at a cost of $10 per unit.
31	Counted inventory and determined that 160 units were on hand.

Required:

1. 1. Prepare the journal entries that would be recorded using a periodic inventory system.
2. 2. Prepare the journal entries that would be recorded using a perpetual inventory system, including any “book-to-physical” adjustment that might be needed.

  TIP: Adjust for shrinkage by decreasing Inventory and increasing Cost of Goods Sold.

1. 3. What is the dollar amount of shrinkage that you were able to determine in (a) requirement 1. and (b) requirement 2? Enter CD (cannot determine) if you were unable to determine the dollar amount of shrinkage.

To determine

To Prepare: Journal entries to record transactions using a periodic inventory system.

Answer to Problem 6CP

Recording transactions by using Periodic inventory system:

Date	Account Title & Explanation	Debit ($)	Credit($)
January 3	Accounts receivable	300
	Sales Revenue		300
	(To record sold goods on account)
January 6	Purchases	300
	Accounts payable		300
	(To record purchase of additional units on account)
January 16	Accounts receivable	450
	Sales Revenue		450
	(To record sale of  goods on account)
January 19	Accounts receivable	400
	Sales Revenue		400
	(To record sale of goods on account)
January 26	Purchases	100
	Accounts payable		100
	(To record purchase of additional units on account)
January 31	Cost of goods sold(1)	2,400
	Purchases		400
	Inventory (2)		2,000
	(To record closing of beginning inventory with cost of goods sold)
	Inventory (3)	1,600
	Cost of goods sold		1,600
	(To record closing of ending inventory with cost of goods sold)

Table (1)

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 3:

• Accounts receivable is an asset and it increases. Hence, debit the accounts receivable by $300.
• Sales revenue is a component of stock holders’ equity and it increases. Hence, credit the sales revenue by $300.

Calculation of the goods sold on account:

$\begin{array}{c}\text{Goods sold on account=No}\text{. of units sold}\times \text{Unit sales price}\\ \text{=20units}\times \text{\$15}\\ \text{=\$300}\end{array}$

On January 6:

• Purchase is an expense account which is a component of stockholders’ equity and it increases. Hence, debit the purchases by $300
• Accounts payable is a liability and it increases. Hence, credit the accounts payable by $300.

Calculation of purchase on account:

$\begin{array}{c}\text{Purchases=No}\text{.of units sold}\times \text{Cost per unit}\\ \text{=30units}\times \text{\$10}\\ \text{=\$300}\end{array}$

On January 16:

• Accounts receivable is an asset and it increases. Hence, debit the accounts receivable by $450.
• Sales revenue is a component of stock holders’ equity and it increases. Hence, credit the sales revenue by $450.

Calculation of the goods sold on account:

$\begin{array}{c}\text{Goods sold on account=No}\text{. of units sold}\times \text{Unit sales price}\\ \text{=30units}\times \text{\$15}\\ \text{=\$450}\end{array}$

On January 19:

• Accounts receivable is an asset and it increases. Hence, debit the accounts receivable by $400.
• Sales revenue is a component of stock holders’ equity and it increases. Hence, credit the sales revenue by $400.

Calculation of the goods sold on account:

$\begin{array}{c}\text{Goods sold on account=No}\text{. of units sold}\times \text{Unit sales price}\\ \text{=20units}\times \text{\$20}\\ \text{=\$400}\end{array}$

On January 26:

• Purchase is an expense account which is a component of stockholders’ equity and it increases. Hence, debit the purchases by $100
• Accounts payable is a liability and it increases. Hence, credit the accounts payable by $100.

Calculation of purchase on account:

$\begin{array}{c}\text{Purchases=No}\text{.of units sold}\times \text{Cost per unit}\\ \text{=10units}\times \text{\$10}\\ \text{=\$100}\end{array}$

On January 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 $2,400.
• Purchase is an expense account which is a component of stockholders’ equity and it increases. Hence, debit the purchases by $400
• Inventory is an asset and it decreases. Hence, credit inventory by $2,000.
• Inventory is an asset and it increases. Hence, debit inventory by $1,600.
• Cost of goods sold is an expense account which is a component of stockholders’ equity and it decreases. Hence, debit cost of goods sold by $2,400.

Calculation of purchase on account:

$\begin{array}{c}\text{Purchases=January 6+January 19}\\ \text{=\$300+\$100}\\ \text{=\$400}\end{array}$

Calculation of cost of goods sold:

Particulars	Amount ($)	Amount ($)
Beginning inventory (2)	2,000
Add: Purchases	400
Cost of goods available for sale	2,400
Less: Ending inventory (3)	1,600
Cost of goods sold		800

Table (2)

(1)

Calculation of beginning Inventory:

$\begin{array}{c}\text{Inventory=Beginning inventory}\times \text{Cost per unit}\\ \text{=200units}\times \text{\$10}\\ =\$2,000\end{array}$ (2)

Calculation of ending Inventory:

$\begin{array}{c}\text{Inventory=Ending inventory}\times \text{Cost per unit}\\ \text{=160units}\times \text{\$10}\\ =\$1,600\end{array}$ (3)

To determine

To Prepare: Journal entries to record transactions using a perpetual inventory system by including any “book-to-physical” adjustment which is needed.

Answer to Problem 6CP

Recording transactions by using Perpetual inventory system:

Date	Account Title & Explanation	Debit ($)	Credit($)
January 3	Accounts receivable	300
	Sales Revenue		300
	(To record sold goods on account)
January 3	Cost of goods sold	200
	Inventory		200
	(To record cost of goods sold)
January 6	Inventory	300
	Accounts payable		300
	(To record purchase of additional units on account)
January 16	Accounts receivable	450
	Sales Revenue		450
	(To record sold goods on account)
January 16	Cost of goods sold	300
	Inventory		300
	(To record cost of goods sold)
	No year-end adjusting entry needed
January 19	Accounts receivable	400
	Sales Revenue		400
	(To record sold goods on account)
January 19	Cost of goods sold	200
	Inventory		200
	(To record cost of goods sold)
January 26	Inventory	100
	Accounts payable		100
	(To record purchase of additional units on account)
January 31	Cost of goods sold	100
	Inventory		100
	(To record “book-to-physical” adjustment)

Table (3)

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 3:

• Accounts receivable is an asset and it increases. Hence, debit the accounts receivable by $300.
• Sales revenue is a component of stock holders’ equity and it increases. Hence, credit the sales revenue by $300.
• Cost of goods sold is an expense which is a component of stockholders’ equity and it increases. Hence, debit cost of goods sold by $300.
• Inventory is an asset and it decreases. Hence, credit inventory by $300.

Calculation of the goods sold on account:

$\begin{array}{c}\text{Goods sold on account=No}\text{. of units sold}\times \text{Unit sales price}\\ \text{=20units}\times \text{\$15}\\ \text{=\$300}\end{array}$

Calculation of cost of goods sold:

$\begin{array}{c}\text{Cost of goods sold=No}\text{. of units sold}\times \text{Cost per unit}\\ \text{=20units}\times \text{\$10}\\ \text{=\$200}\end{array}$

On January 6:

• Inventory is an asset and it increases. Hence, debit the inventory by $300
• Accounts payable is a liability and it increases. Hence, credit the accounts payable by $300.

Calculation of purchase on account:

$\begin{array}{c}\text{Inventory=No}\text{.of units sold}\times \text{Cost per unit}\\ \text{=30units}\times \text{\$10}\\ \text{=\$300}\end{array}$

On January 16:

• Accounts receivable is an asset and it increases. Hence, debit the accounts receivable by $450.
• Sales revenue is a component of stock holders’ equity and it increases. Hence, credit the sales revenue by $450.
• Cost of goods sold is an expense which is a component of stockholders’ equity and it increases. Hence, debit cost of goods sold by $300.
• Inventory is an asset and it decreases. Hence, credit inventory by $300.

Calculation of the goods sold on account:

$\begin{array}{c}\text{Goods sold on account=No}\text{. of units sold}\times \text{Unit sales price}\\ \text{=30units}\times \text{\$15}\\ \text{=\$450}\end{array}$

Calculation of cost of goods sold:

$\begin{array}{c}\text{Cost of goods sold=No}\text{. of units sold}\times \text{Cost per unit}\\ \text{=30units}\times \text{\$10}\\ \text{=\$300}\end{array}$

On January 19:

• Accounts receivable is an asset and it increases. Hence, debit the accounts receivable by $400.
• Sales revenue is a component of stock holders’ equity and it increases. Hence, credit the sales revenue by $400.
• Cost of goods sold is an expense which is a component of stockholders’ equity and it increases. Hence, debit cost of goods sold by $200.
• Inventory is an asset and it decreases. Hence, credit inventory by $200.

Calculation of the goods sold on account:

$\begin{array}{c}\text{Goods sold on account=No}\text{. of units sold}\times \text{Unit sales price}\\ \text{=20units}\times \text{\$20}\\ \text{=\$400}\end{array}$

Calculation of cost of goods sold:

$\begin{array}{c}\text{Cost of goods sold=No}\text{. of units sold}\times \text{Cost per unit}\\ \text{=20units}\times \text{\$10}\\ \text{=\$200}\end{array}$

On January 26:

• Inventory is an asset and it increases. Hence, debit the inventory by $100
• Accounts payable is a liability and it increases. Hence, credit the accounts payable by $100.

Calculation of purchase on account:

$\begin{array}{c}\text{Inventory=No}\text{.of units sold}\times \text{Cost per unit}\\ \text{=10units}\times \text{\$10}\\ \text{=\$100}\end{array}$

On January 31:

• Cost of goods sold is an expense which is a component of stockholders’ equity and it increases. Hence, debit cost of goods sold by $100.
• Inventory is an asset and it decreases. Hence, credit inventory by $100.

Calculation of shrinkage units:

$\begin{array}{c}\text{Shrinkage units=Beginning inventory+Purchases}-\text{Sales}\\ \text{=}\left[\begin{array}{l}\text{200units+}\\ \left[\text{30units(January 6)+10units(January 26)}\right]-\\ \left[\begin{array}{l}20\text{units}(\text{January 3)+30units(January 16)+}\\ \text{20units(January19)}\end{array}\right]\end{array}\right]\\ =170\text{book}\end{array}$

Calculation of “book-to-physical”:

$\begin{array}{c}\text{Shrinkage units=170book units Vs 160 physical units which is in hand}\\ \text{=10units of shrinkage}\end{array}$

$\begin{array}{c}\text{Book-to-physical=No}\text{.of units}\times \text{Cost per unit}\\ \text{=10units}\times \text{\$10}\\ \text{=\$100}\end{array}$

To determine

The dollar amount of shrinkage in (a) requirement 1

Explanation of Solution

By usingperiodic inventory system in requirement 1 the dollar amount of shrinkage cannot   be determined.