Chapter 6, Problem 6PA

To determine

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:

$\begin{array}{c}\text{Value of inventory returned=Number of units returned}\times \text{Rate per unit}\\ \text{=10 units}\times \text{\$50}\\ \text{=\$500}\end{array}$

• 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:

$\begin{array}{c}\text{Dicount Amount }=\left[\begin{array}{c}\left(\text{Invoice Price}-\text{Purchase Return}\right)\\ \times \text{ Rate of Discount}\end{array}\right]\\ =\left(\text{\$6,500}-\$500\right)\times 2\text{\%}\\ =\text{\$120}\end{array}$ (3)

Compute the amount due to the supplier:

Compute the accounts payable:

Invoice price = $6,500 (1)

Purchase return = $500 (2)

$\begin{array}{c}\text{Accounts payable}=\left(\begin{array}{l}\text{Invoice price }-\\ \text{Purchase return}\end{array}\right)\\ =\$6,500-\$500\\ =\$6,000\end{array}$ (4)

Compute the total amount due to the suppliers:

Accounts receivables = $12,800(4)

Purchase discount = $128 (3)

$\begin{array}{c}\text{Amount due to the suppliers}=\left(\begin{array}{l}\text{Accounts Receviables }\\ -\text{Purchase discount}\end{array}\right)\\ =\$6,000-\$120\\ =\$5,880\end{array}$ (5)

• 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:

$\begin{array}{c}\text{Cost of goods sold=}\left[\begin{array}{l}\left(\text{Total number of units before October 4}\times \text{Cost per unit}\right)\\ +\left(\text{Total number of units after October 4}\times \text{Cost per unit}\right)\end{array}\right]\\ =\left[\left(50\text{units}\times \text{\$50}\right)+\left(\text{110}\text{units}\times \text{\$54}\right)\right]\\ =\$250+\$5,940\\ =\$8,440\end{array}$

• 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:

$\begin{array}{c}\text{Cost of goods sold=}\left[\begin{array}{l}\left(\begin{array}{l}\text{Total number of units remaining after October 15 sale}\times \\ \text{Cost per unit}\end{array}\right)+\\ \left(\begin{array}{l}\text{Total number of units on October 20 purchase}\\ \times \text{Cost per unit}\end{array}\right)\end{array}\right]\\ =\left[\left(10\text{units}\times \text{\$54}\right)+\left(\text{90}\text{units}\times \text{\$70}\right)\right]\\ =\$540+\$6,300\\ =\$6,840\end{array}$

• 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.

To determine

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 $\left[\left(100\text{units}-90\text{units}\right)\times \$70\right]$  $700 whereas the net realizable value of ending inventory $\left[\left(100\text{units}-90\text{units}\right)\times \$35\right]$ is $350. Hence, the net realizable value of $350 which is the lesser amount is the amount to which the ending inventory is to be adjusted to.

3.

To determine

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)

$\begin{array}{c}\text{Cost of goods sold=}\left(\text{Cost of units sold+Write down to net realizable value}\right)\\ =\left(\$8,440+\$6,840\right)+\$350\\ =\left(\$15,280\right)+\$350\\ =\$15,630\end{array}$