Question

The following information applies to the questions displayed below) At the beginning of Year 2, the Redd Company had the following balances in its accounts: Cash Inventory Land Common stock Retained earnings $ 6,900 15,000 7,000 15,000 13,900 During Year 2, the company experienced the following events: 1. Purchased inventory that cost $5,200 on account from Ross Company under terms 1/10, n/30. The merchandise was delivered FOB shipping point. Freight costs of $190 were paid in cash. 2. Returned $400 of the inventory it had purchased from Ross Company because the inventory was damaged in transit. The seller agreed to pay the return freight cost. 3. Paid the amount due on its account payable to Ross Company within the cash discount period. 4. Sold inventory that had cost $6,800 for $12,100 on account, under terms 2/10. n/45. 5. Received merchandise returned from a customer. The merchandise originally cost $900 and was sold to the customer for $1,680 cash. The customer was paid $1,680 cash for the returned merchandise. 6. Delivered goods FOB destination in Event 4. Freight costs of $140 were paid in cash. 7. Collected the amount due on the account receivable within the discount period. 8. Sold the land for $8,500. 9. Recognized accrued interest income of $600. 10. Took a physical count indicating that $13.400 of inventory was on hand at the end of the accounting period. (Hint Determine the current balance in the inventory account before calculating the amount of the inventory write down.)

Answer 1

Closing Entries :

Accounts	Debit	Credit
Sales	10,420.00
Interest Income	600.00
Gain of sale of Land	1,500.00
Cash Discount Received	480.00
Revenue Account		13,000.00
(Transfer of Income GLs)
Cost of Good Sold		5,914.62
Inventory Write off		675.38
Cash Discount Paid		242.00
Freight		140.00
Expense Account	6,972.00
(Transfer of Expenses GLs)
Revenue Account	13,000
Retained Earning		13,000
(Transfer of Revenue Account)
Retained Earning	6,972
Expense Account		6,972
(Transfer of Expenses Account)

As per generally accepted accounting principle, the inventory is valued at landed cost hence freight cost will be included in inventory rather than expense out. Further when purchase return is carried out for $400 the reduction from inventory value will be $414.62 since it will be landed cost of inventory and since we are only going to get from vendor $400 for purchase return balance $14.62 needs to be debited to cost of good sold.

Working Notes :

Journal Entries for Transactions :

Account	Debit	Credit
Inventory	5,390.00
Ross Company		5,200.00
Cash		190.00
(Purchase of goods)
Cost of goods sold	14.62
Ross Company	400.00
Inventory		400.00
Inventory		14.62
(Return of purchase of goods)
Ross Company	4,800.00
Cash		4,320.00
Cash Discount		480.00
(Payment of purchased goods)
Account Receivable	12,100.00
Sales		12,100.00
(Sales on Account)
Cost of goods sold	6,800.00
Inventory		6,800.00
(Cost of goods sold for sales)
Freight	140.00
Cash		140.00
(Freight on sales)
Cash Discount	242.00
Account Receivable		242.00
(Cash discount paid)
Cash	11,858.00
Account Receivable		11,858.00
(Cash received for sales on account after cash discount)
Cash	8,500.00
Gain on sale of land		1,500.00
land		7,000.00
(Sale of land on gain)
Intrest receivable	600.00
Interest Income		600.00
(Accrued Interest accounted)
Sales	1,680.00
Cash		1,680.00
(Cash paid for sales return)
Inventory	900.00
Cost of Good sold		900.00
(Inventory & COGS entry for sales return)
Inventory Written Off	675.38
Inventory		675.38
(Write off inventory on physical stock taking)

Derivation of Ledger Trial Balances :

Account	Op Balance	Debit	Credit	Closing Balance
Inventory	15,000.00	5,875.38	7,475.38	13,400.00
Cash	6,900.00	20,358.00	6,330.00	20,928.00
Land	7,000.00		7,000.00	-
Cash Discount Received			480.00	(480.00)
Cash Discount Paid		242.00		242.00
Interest			600.00	(600.00)
Sales		12,100.00	1,680.00	10,420.00
Cost of Good Sold		6,814.62	900.00	5,914.62
Freight		140.00		140.00
Gain on Sale of Land			1,500.00	(1,500.00)

Income Statement :

Income Statement
Sales	10,420.00
Cost of Good Sold	(5,914.62)
Inventory Write off	(675.38)
Cash Discount Paid	(242.00)
Freight	(140.00)
Interest Income	600.00
Gain of sale of Land	1,500.00
Cash Discount Received	480.00
Profit	6,028.00

Balance Sheet
Inventory	13,400.00
Cash	20,928.00
Interest Receivable	600.00
Total Assets	34,928.00
Common stock	15,000.00
Retained Earning	13,900.00
P&L	6,028.00
Total Liabilities	34,928.00