Question

The following information is available for the Johnson Corporation for 2018:

Beginning inventory	$	27,000
Merchandise purchases (on account)		157,000
Freight charges on purchases (paid in cash)		12,000
Merchandise returned to supplier (for credit)		14,000
Ending inventory		32,000
Sales (on account)		252,000
Cost of merchandise sold		150,000

Required:
Applying both a perpetual and a periodic inventory system, prepare the journal entries that summarize the transactions that created these balances. Include all end-of-period adjusting entries indicated.

Answer 1

Under perpetual cost accounting system, inventory records are updated continously as and when production related transactions take place. As there are greater possibility for losses due to defects or thefts, etc. in the production process, manufacturing firms follow perpetual inventory system to trace all costs effectively. Under periodic cost accounting system, inventory records are updated at the end of applicable period only. As a result, firm loses control over tracing production losses via defectives or thefts, etc. and those losses will be charged to cost of goods manufactured. Here, temperary accounts such as purchases, purchase returns and freight-in are used to record inventory purchase and return transactions. Balance in these accounts will be closed to cost of goods sold and ending inventory accounts at the end of the reporting period concerned.

Perpetual inventory system: Periodic inventory system Transaction: Credit Account Titles Debit Credit Account Titles Debit $157,000 $157,000 Purchase Purchases Inventory Accounts payable $157,000 $157,000 Accounts payable $12,000 $12,000 Freight Paid Freight-in Inventory $12,000 Cash $12.000 Cash $14,000 $14,000 Purchase Returns Accounts payable Accounts payable $14,000 $14,000 Inventory Purchase returns $252,000 $252,000 Sale Accounts receivable Accounts receivable $252,000 $252,000 Sales revenue Sales revenue $150,000 No Entry Cost of goods sold $150,000 Inventory End of period Cost of goods sold $150,000 No Entry $32,000 Inventory (ending) [Balancing figure] $14,000 Purchase returns $27,000 Inventory (beginning) $157,000 Purchases Freight-in $12,000