Chapter 6, Problem 6PA

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

Home Hardware reported beginning inventory of 20 shovels, for a total cost of $ 100. The company had the following transactions during the month:

Jan. 2	Sold 4 shovels on account at a selling price of $ 10 per unit.
16	Sold 10 shovels on account at a selling price of $10 per unit.
18	Bought 5 shovels on account at a cost of $5 per unit.
19	Sold 10 shovels on account at a selling price of $10 per unit.
24	Bought 10 shovels on account at a cost of $5 per unit.
31	Counted inventory and determined that 10 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.
3. 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 6PA

Recording transactions by using Periodic inventory system:

Date	Account Title & Explanation	Debit ($)	Credit($)
January 2	Accounts receivable	40
	Sales Revenue		40
	(To record sale of goods on account)
January 16	Accounts receivable	100
	Sales Revenue		100
	(To record sale of goods on account)
January 18	Purchases	25
	Accounts payable		25
	(To record purchase of additional units on account)
January 19	Accounts receivable	100
	Sales Revenue		100
	(To record sale of goods on account)
January 24	Purchases	50
	Accounts payable		50
	(To record purchase of additional units on account)
January 31	Cost of goods sold(1)	175
	Purchases		75
	Inventory (2)		100
	(To record closing of beginning inventory with cost of goods sold)
	Inventory (3)	50
	Cost of goods sold		50
	(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 2:

• Accounts receivable is an asset and it increases. Hence, debit the accounts receivable by $40.
• Sales revenue is a component of stock holders’ equity and it increases. Hence, credit the sales revenue by $40.

Calculation of the goods sold on account:

$\begin{array}{c}\text{Goods sold on account=No}\text{. of units sold}\times \text{Unit sales price}\\ \text{=4units}\times \text{\$10}\\ \text{=\$40}\end{array}$

On January 16:

• Accounts receivable is an asset and it increases. Hence, debit the accounts receivable by $100.
• Sales revenue is a component of stock holders’ equity and it increases. Hence, credit the sales revenue by $100.

Calculation of the goods sold on account:

$\begin{array}{c}\text{Goods sold on account=No}\text{. of units sold}\times \text{Unit sales price}\\ \text{=10units}\times \text{\$10}\\ \text{=\$100}\end{array}$

On January 18:

• Purchase is an expense account which is a component of stockholders’ equity and it increases. Hence, debit the purchases by $25
• Accounts payable is a liability and it increases. Hence, credit the accounts payable by $25.

Calculation of purchase on account:

$\begin{array}{c}\text{Purchases=No}\text{.of units sold}\times \text{Cost per unit}\\ \text{=5units}\times \text{\$5}\\ \text{=\$25}\end{array}$

On January 19:

• Accounts receivable is an asset and it increases. Hence, debit the accounts receivable by $100.
• Sales revenue is a component of stock holders’ equity and it increases. Hence, credit the sales revenue by $100.

Calculation of the goods sold on account:

$\begin{array}{c}\text{Goods sold on account=No}\text{. of units sold}\times \text{Unit sales price}\\ \text{=10units}\times \text{\$10}\\ \text{=\$100}\end{array}$

On January 24:

• Purchase is an expense account which is a component of stockholders’ equity and it increases. Hence, debit the purchases by $50
• Accounts payable is a liability and it increases. Hence, credit the accounts payable by $50.

Calculation of purchase on account:

$\begin{array}{c}\text{Purchases=No}\text{.of units sold}\times \text{Cost per unit}\\ \text{=10units}\times \text{\$5}\\ \text{=\$50}\end{array}$

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 $175.
• Purchase is an expense account which is a component of stockholders’ equity and it increases. Hence, debit the purchases by $75
• Inventory is an asset and it decreases. Hence, credit inventory by $100.
• Inventory is an asset and it increases. Hence, debit inventory by $50.
• Cost of goods sold is anexpense account which is a component of stockholders’ equity and it decreases. Hence, credit cost of goods sold by $50.

Calculation of cost of goods sold:

Particulars	Amount ($)	Amount ($)
Beginning inventory (2)	100
Add: Purchases	75
Cost of goods available for sale	175
Less: Ending inventory (3)	50
Cost of goods sold		125

Table (2)

(1)

Calculation of beginning Inventory:

$\begin{array}{c}\text{Inventory=Beginning inventory}\times \text{Cost per unit}\\ \text{=20units}\times \text{\$5}\\ =\$100\end{array}$ (2)

Calculation of ending Inventory:

$\begin{array}{c}\text{Inventory=Ending inventory}\times \text{Cost per unit}\\ \text{=10units}\times \text{\$5}\\ =\$50\end{array}$ (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 6PA

Recording transactions by using Perpetual inventory system:

Date	Account Title & Explanation	Debit ($)	Credit($)
January 2	Accounts receivable	40
	Sales Revenue		40
	(To record sale of goods on account)
January 2	Cost of goods sold	20
	Inventory		20
	(To record cost of goods sold)
January 16	Accounts receivable	100
	Sales Revenue		100
	(To record sale of goods on account)
January 16	Cost of goods sold	50
	Inventory		50
	(To record cost of goods sold)
January 18	Inventory	25
	Accounts payable		25
	(To record purchase of additional units on account)
January 19	Accounts receivable	100
	Sales Revenue		100
	(To record sale of goods on account)
January 19	Cost of goods sold	50
	Inventory		50
	(To record cost of goods sold)
January 24	Inventory	50
	Accounts payable		50
	(To record purchase of additional units on account)
January 31	Cost of goods sold	5
	Inventory		5
	(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 $40.
• Sales revenue is a component of stock holders’ equity and it increases. Hence, credit the sales revenue by $40.
• 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 $20.
• Inventory is an asset and it decreases. Hence, credit inventory by $20.

Calculation of the goods sold on account:

$\begin{array}{c}\text{Goods sold on account=No}\text{. of units sold}\times \text{Unit sales price}\\ \text{=4units}\times \text{\$10}\\ \text{=\$40}\end{array}$

Calculation of cost of goods sold:

$\begin{array}{c}\text{Cost of goods sold=No}\text{. of units sold}\times \text{Cost per unit}\\ \text{=4units}\times \text{\$5}\\ \text{=\$20}\end{array}$

On January 16:

• Accounts receivable is an asset and it increases. Hence, debit the accounts receivable by $100.
• Sales revenue is a component of stock holders’ equity and it increases. Hence, credit the sales revenue by $100.
• 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 $50.
• Inventory is an asset and it decreases. Hence, credit inventory by $50.

Calculation of the goods sold on account:

$\begin{array}{c}\text{Goods sold on account=No}\text{. of units sold}\times \text{Unit sales price}\\ \text{=10units}\times \text{\$10}\\ \text{=\$100}\end{array}$

Calculation of cost of goods sold:

$\begin{array}{c}\text{Cost of goods sold=No}\text{. of units sold}\times \text{Cost per unit}\\ \text{=10units}\times \text{\$5}\\ \text{=\$50}\end{array}$

On January 18:

• Inventory is an asset and it increases. Hence, debit the inventory by $25
• Accounts payable is a liability and it increases. Hence, credit the accounts payable by $25.

Calculation of purchase on account:

$\begin{array}{c}\text{Inventory=No}\text{.of units sold}\times \text{Cost per unit}\\ \text{=5units}\times \text{\$5}\\ \text{=\$25}\end{array}$

On January 19:

• Accounts receivable is an asset and it increases. Hence, debit the accounts receivable by $100.
• Sales revenue is a component of stock holders’ equity and it increases. Hence, credit the sales revenue by $100.
• 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 $50.
• Inventory is an asset and it decreases. Hence, credit inventory by $50.

Calculation of the goods sold on account:

$\begin{array}{c}\text{Goods sold on account=No}\text{. of units sold}\times \text{Unit sales price}\\ \text{=10units}\times \text{\$10}\\ \text{=\$100}\end{array}$

Calculation of cost of goods sold:

$\begin{array}{c}\text{Cost of goods sold=No}\text{. of units sold}\times \text{Cost per unit}\\ \text{=10units}\times \text{\$5}\\ \text{=\$50}\end{array}$

On January 24:

• Inventory is an asset and it increases. Hence, debit the inventory by $50
• Accounts payable is a liability and it increases. Hence, credit the accounts payable by $50.

Calculation of purchase on account:

$\begin{array}{c}\text{Inventory=No}\text{.of units sold}\times \text{Cost per unit}\\ \text{=10units}\times \text{\$5}\\ \text{=\$50}\end{array}$

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 $5.
• Inventory is an asset and it decreases. Hence, credit inventory by $5.

Calculation of shrinkage units:

$\begin{array}{c}\text{Shrinkage units=Beginning inventory+Purchases}-\text{Sales}\\ \text{=}\left[\begin{array}{l}\text{20units+}\\ \left[\text{5units(January 18)+10units(January 24)}\right]-\\ \left[\begin{array}{l}\text{4units}(\text{January 2)+10units(January 16)+}\\ \text{10units(January19)}\end{array}\right]\end{array}\right]\\ =11\text{book}\end{array}$

Calculation of “book-to-physical”:

$\begin{array}{c}\text{Shrinkage units=11book units Vs 10 physical units which is in hand}\\ \text{=1unit of shrinkage}\end{array}$

$\begin{array}{c}\text{Book-to-physical=No}\text{.of units}\times \text{Cost per unit}\\ \text{=1units}\times \text{\$5}\\ \text{=\$5}\end{array}$

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.