Question

Bower Consulting Company started the period with cash of $25,000, 500 units of inventory with a cost of $20,000 (uses FIFO) , common stock of $20,000 and retained earnings of $25,000. Bower engaged in the following transactions in 2013: Transactions during 2013 1 Purchased with cash 50 units of inventory for $2,500 2 Purchased on account 250 units of inventory for $14,000 3 Sold 750 units of inventory for $112,500. This was a cash sale 4 Sold 10 units of inventory for $1,500. This was a cash sale 5 Made a partial refund for 8 units to the customer who purchased the 10 units in the transaction above. Information for Adjusting Entries 6 Bower carries only one type of inventory item. At year end the market value of each unit of inventory was $45 per unit. Re-evaluate the value of the ending inventory and prepare the necessary journal entry, assuming Bower applies the lower of cost or market rule to individual items Required Points 1 Classify each transaction as AS, AU, AE or CE 6 2 Journal Entries 12 3 T-accounts 6 4 Trial Balance 2 5 Income Statement 5 6 Statement of changes in equity 5 7 Balance sheet 5 8 Statement of cash flow 5 9 Closing entries 4 50

Answer 1

1) Classification of Each transaction as AS, AU, AE or CE is shown as follows:-

No	Transaction	Transaction Type
a)	Purchase inventory with cash	Asset Exchange (as inventory will increase and cash will decrease and total assets remain same)
b)	Purchase of inventory on account	Asset Source (as inventory increase and accounts payable also increase, total assets increase)
c)	Sale of inventory for cash	Asset Source (Cash and sales will increase)
	Cost of goods sold for inventory	Asset Use (Inventory decrease and cost of goods sold increase)
d)	Sales of inventory for cash	Same as in part c
e)	Sale return for cash	Asset use (Cash decrease and Sale returns increase)
	Cost of sales return	Asset source (Inventory increase and cost of goods sold decrease)
f)	Adjustment of inventory cost to market value	Asset use (Cost of goods sold increase and inventory decrease)

Ending Inventory in units = Total units available for sale - (Units sold - Units returned from sale)

= (500 units+50 units+250 units) - (750 units+10 units-8 units)

= 800 units - 752 units = 48 units

As FIFO method is used, the goods purchased first are sold first. The ending inventory of 48 units will be from goods purchased last (i.e purchase of 250 units for $14,000) at $56 per unit (14,000/250 units).

The market value of inventory is $45 per unit. Therefore inventory will decrease by $528 [48 units*(56-45)].

2) Journal Entries (Amounts in $)

No	Account Titles and Explanations	Debit	Credit
a)	Inventory	2,500
	Cash		2,500
	(To record the purchase of inventory for cash)
b)	Inventory	14,000
	Accounts Payable		14,000
	(To record the purchase of inventory on credit)
c)	Cash	112,500
	Sales Revenue		112,500
	(To record the cash sales)
	Cost of goods sold [(500 units*$40)+(50 units*$50)+(200 units*$56)]	33,700
	Inventory		33,700
	(To record the cost of goods sold)
d)	Cash	1,500
	Sales Revenue		1,500
	(To record the cash sales)
	Cost of goods sold (10 units*$56)	560
	Inventory		560
	(To record the cost of sales)
e)	Sales Returns and Allowances (1,500*8/10)	1,200
	Cash		1,200
	(To record the sales returns)
	Inventory (8*$56)	448
	Cost of goods sold		448
	(To record the cost of sale returns)
f)	Cost of goods sold [48 units*(56-45)]	528
	Inventory		528
	(To adjust the cost of inventory to market value)

3) Posting of the above journal entries to T-Accounts are shown as follows:- (Amounts in $)

Cash
Account Titles	Debit	Credit	Balance
Beginning balance	25,000		25,000
Inventory		2,500	22,500
Sales revenue	112,500		135,000
Sales revenue	1,500		136,500
Sales returns and allowances		1,200	135,300
Ending Balance			135,300

Inventory
Account Titles	Debit	Credit	Balance
Beginning balance	20,000		20,000
Cash	2,500		22,500
Accounts payable	14,000		36,500
Cost of goods sold		33,700	2,800
Cost of goods sold		560	2,240
Cost of goods sold	448		2,688
Cost of goods sold		528	2,160
Ending Balance			2,160

Accounts Payable
Account Titles	Debit	Credit	Balance
Inventory		14,000	14,000
Ending Balance			14,000

Sales Revenue
Account Titles	Debit	Credit	Balance
Cash		112,500	112,500
Cash		1,500	114,000
Ending Balance			114,000

Cost of Goods Sold
Account Titles	Debit	Credit	Balance
Inventory	33,700		33,700
Inventory	560		34,260
Inventory		448	33,812
Inventory	528		34,340
Ending Balance			34,340

Sales Returns and Allowances
Account Titles	Debit	Credit	Balance
Cash	1,200		1,200
Ending Balance			1,200

Common Stock
Account Titles	Debit	Credit	Balance
Beginning Balance		20,000	20,000
Ending Balance			20,000

Retained Earnings
Account Titles	Debit	Credit	Balance
Beginning Balance		25,000	25,000
Ending Balance			25,000

4) Trial balance for 2013 is shown as follows:- (Amounts in $)

Account Titles	Debit	Credit
Cash	135,300
Inventory	2,160
Accounts Payable		14,000
Sales Revenue		114,000
Cost of Goods Sold	34,340
Sales Returns and Allowances	1,200
Common Stock		20,000
Retained Earnings		25,000
Totals	173,000	173,000