Question

Monrose Park had the following transactions during the month of November 2018.

Nov 2                        Purchased 1,000 widgets for $20 per unit on credit

Nov 5                        Sold 900 widgets for $55 each for cash

Nov 10                     Purchased 500 widgets for $25 per unit on credit

Nov 18                     Sold 100 widgets for $60 each on credit

Nov 29                     Sold 300 widgets for $50 each for cash

Monrose Park uses a perpetual inventory system and the FIFO inventory valuation method. There were no widgets in the company’s opening inventory for November.

a) Record the above transactions in the general journal.

Date	Account Title and Explanation	Debit	Credit

b) Prepare the schedule to calculate ending inventory after the above transactions.

Date	Purchases			Sales			Balance
	Quantity	Unit Cost	Value	Quantity	Unit Cost	Value	Quantity	Unit Cost	Value
Nov 1
Nov 2
Nov 5
Nov 10
Nov 18
Nov 29
Ending Inventory

c) Calculate the value of merchandise inventory using the lower of cost and net realizable value (LCNRV).

				LCNRV Applied to
Description	Category	Cost	NRV	Individual	Category
Widget A	Widgets	$3,000	$2,300
Widget B	Widgets	2,000	3,300
Total widgets
Total

d) Record the journal entry to adjust the value of merchandise inventory to the lower of cost and net realizable value based on individual items using the results from c).

Date	Account Title and Explanation	Debit	Credit

e) Prepare an excerpt of the multiple-step income statement for the month showing sales revenue, cost of goods sold, and gross profit.

f) Sales for December were $100,000 and purchases were $68,500. Using the gross profit method, estimate the closing value of inventory. Assume the gross profit margin from November will be the gross profit margin for December.

Sales Revenue		$100,000
Cost of Goods Sold
Opening Inventory
Purchases	68,500
Cost of Goods Available for Sale
Closing Inventory
Cost of Goods Sold
Gross Profit

Answer 1

a)
Journal Entry
Date	Account Title and Explanation	Debit	Credit
Nov-02	Inventory (1,000*$20)	$20,000
	Accounts Payable		$20,000
	(Purchase Inventory on account 1000*$20)
Nov-05	Cash (900*$55)	$49,500
	Sales		$49,500
	(Sold merchandise on Cash 900*$55)
Nov-05	Cost of Goods Sold (900*$20)	$18,000
	Inventory		$18,000
	(Cost of merchandise Sold on Cash 900*$20)
Nov-10	Inventory (500*$25)	$12,500
	Accounts Payable		$12,500
	(Purchase Inventory on account 500*$25)
Nov-18	Cash (100*$60)	$6,000
	Sales		$6,000
	(Sold merchandise on Cash 100*$60)
	Cost of Goods Sold (100*$20)	$2,000
	Inventory		$2,000
	(Cost of merchandise Sold on Cash 100*$20)
Nov-29	Cash (300*$50)	$15,000
	Sales		$15,000
	(Sold merchandise on Cash 300*$50)
	Cost of Goods Sold (300*$25)	$7,500
	Inventory		$7,500
	(Cost of merchandise Sold on Cash 300*$25)

b)
Statement Showing Ending inventory
Date	Purchases			Sales			Balance
	Quantity	Unit Cost	Value	Quantity	Unit Cost	Value	Quantity	Unit Cost	Value
Nov-01
Nov-02	1000	20	$20,000				1000	20	$20,000
Nov-05				900	20	$18,000	100	20	$2,000
Nov-10	500	25	$12,500				100	20	$2,000
							500	25	$12,500
Nov-18				100	20	$2,000	500	25	$12,500
Nov-29				300	25	$7,500	200	25	$5,000
* Since company follows FIFO method Sale of merchandise should be deducted from the inventory purchased first.

c)
Statement Showing Calculation of the value of merchandise inventory using the lower of cost and net realizable value (LCNRV).
	Description	Category	Cost	NRV	Individual	Category
	Widget A	Widgets	$3,000	$2,300	$2,300
	Widget B	Widgets	$2,000	$3,300	$2,000
	Total widgets		$5,000	$5,600	$4,300	$5,000
	Total				$4,300	$5,000
* Inventory be valued at the lesser amount of its laid-down cost and the amount for which it can likely be sold—its net realizable value(NRV). This concept is known as the lower of cost and net realizable value.

d)
Because the LCNRV is lower than cost, an adjusting entry must be recorded as follows:
Date	Accounts Title and Explanation	Debit	Credit
Year End	Cost Of Goods Sold	$700
	Merchandise Inventory		$700