Question

2.75 LO71.7-2.74,75 74 Recording Inventory Transactions. Connutina Ending Inventor and Cost or Determining the Errects or LC&NRV Rule on the Inventory Turnover Chaiz Inc. specializes in importing furniture for commercial use es importing furniture for commercial use. Chaiz reported the following information all transactions are on account) for the quarter ending September Date Transaction Units Amount per Unit July 1 Inventory 224 $36.0 July 13 Purchase 152 35.5 July 29 Sale 242 49.5 August 3 Purchase 112 34.5 August 16 Purchase 204 32.5 September 21 Sale 134 49.0 Chaiz uses the perpetual inventory system and the FIFO method for inventory costing, Required: 1. Prepare journal entries to record the transactions on July 13 and July 29. 2. Compute the cost of ending inventory at September 30, 2018, and the cost of sales, gross profit, and gross profit percentage for the quarter ending September 30, 2018. 3. Would Chaiz's gross profit increase or decrease if it uses the weighted average cost method instead of FIFO? Explain without re-computing the gross profit 4. Chaiz is required to report its ending inventory at the lower of cost and net realizable value. The net realizable value of chairs decreased to $33 per unit on September 30, 2018. Prepare the adjusting entry to reflect the application of the LC&NRV rule. 5. Assume that Chaiz's accountant did not apply the LC&NRV rule, and that the company inventoru turnover for the quarter ended September 30, 2018, is 1.45. Re-compute the inventory tumover using the correct value for ending inventory. Three Alternative Inventory Methods and Deciding

Answer 1

1.

Date	General Journal	Debit	Credit
July 13	Inventory (152 x $35.50)	5396
	Accounts payable		5396
	(To record inventory purchased on account)
July 29	Accounts receivable (242 x $49.50)	11979
	Sales revenue		11979
	(To record sales on account)
	Cost of goods sold	8703
	Inventory		8703
	(To record the cost of goods sold)

2.

Perpetual FIFO
	Purchases			Cost of Goods Sold			Balance in Inventory
Date	Units	Unit cost	Total $	Units	Unit cost	Total $	Units	Unit cost	Total $
July 1							224	36.0	8064
July 13	152	35.5	5396				224	36.0	8064
							152	35.5	5396
July 29				224	36.0	8064
				18	35.5	639	134	35.5	4757
August 3	112	34.5	3864				134	35.5	4757
							112	34.5	3864
August 16	204	32.5	6630				134	35.5	4757
							112	34.5	3864
							204	32.5	6630
September 21				134	35.5	4757	112	34.5	3864
							204	32.5	6630
Total	468		15890	376		13460	316		10494

Cost of ending inventory: $10494

Cost of sales: $13460

Gross profit: Sales - Cost of sales = [(242 x $49.5) + (134 x $49)] - $13460 = [$11979 + $6566] - $13460 = $18545 - $13460 = $5085

Gross profit percentage: Gross profit/Sales = $5085/$18545 = 27.42%

3. If Chaiz uses the weighted-average cost method, its gross profit would increase since the prices are decreasing.

4.

Date	General Journal	Debit	Credit
Sept. 30	Cost of goods sold [$10494 - (316 x $33)]	66
	Inventory		66
	(To record inventory at LC&NRV)

5. Inventory turnover = Cost of goods sold/Average Inventory

Cost of goods sold = $13460 + $66 = $13526

Average inventory = (Beginning inventory + Ending inventory)/2 = ($8064 + $10428)/2 = $18492/2 = $9246

Inventory turnover = $13526/$9246 = 1.46