Question

Q1) Shining Cars Inc. sells Auto spare parts. At December 31, 2015, Shining Cars’ inventory amounted to $1,000,000. During the first week in January 2016, the company made only one purchase and one sale. These transactions were as follows:

Jan. 2 Purchased 20 tyres and 80 brakes from Automonsters. The total cost of these spare parts was $50,000, terms 3/10, n/60.

Jan. 6 Sold 30 different types of products on account to Ralf Corporation. The total sales price was $20,000, terms 5/10, n/90. The total cost of these 30 units to Shining Cars was $12,200 (net of the purchase discount).

Shining Cars has a full-time accountant and a computer-based accounting system. It records sales at the gross sales price and purchases at net cost and maintains subsidiary ledgers for accounts receivable, inventory, and accounts payable.

Instructions

1. Briefly describe the operating cycle of a merchandising company. Identify the assets and liabilities directly affected by this cycle.
2. Prepare journal entries to record these transactions, assuming that Shining Cars uses a perpetual inventory system.
3. Compute the balance in the Inventory account at the close of business on January 6.
4. Prepare journal entries to record the two transactions, assuming that Shining Cars uses a periodic inventory system.
5. Compute the cost of goods sold for the first week of January assuming use of the periodic system. (Use your answer to part c as the ending inventory.)
6. Which type of inventory system do you think Shining Cars most likely would use? Explain your reasoning.

Answer 1

Following are the answer to the question posted:

1. Operating cycle of a merchandising company begins when it purchases inventory from the supplier sells the inventory and collect the cash. The main assets are debtors, cash and inventory and main liability is Trade Payable.

2. Purchases Dr. 50,000

To Creditors 50,000

Debtors Dr. 20,000

To Sales 20,000

Cost of Goods Sold Dr 12200

To Inventory 12200

3. Inventory balance as on 6 Jan is 1,037,800

4. Under the periodic system, entry is passed after a certain period. Thus same entry can be passed