Question

Esperado Furnishings are retailers who purchase and sell household furnishings, including table
lamps. The business uses a perpetual inventory system and adjusts cost of goods sold for any
shortage or excess inventory. The business began the last quarter of 2018 with merchandise
inventory of 10 pairs of “Italia” table lamps at a total cost of $168,200.
The following transactions, relating to the “Italia” brand were completed during the quarter:
October 5 Purchased 15 pairs of lamps at a cost of $17,020 per pair.
October 14 Sold 18 pairs of lamps to Muller Furnishings at $22,250 per pair
October 22 Purchased 24 pairs at a cost of $18,175 per pair but the supplier gave a 4% quantity
discount.
November 10 Sold 15 pairs of lamps to Orion Household Ltd and 10 pairs to Brown’s Furnishings
which yielded total sales revenue of $589,750.
November 12 Owing to an increased demand for this product, 30 pairs of lamps were purchased
on account at a cost of $17,612 per pair. In addition, Esperado paid $288 in
cash on each pair of lamps to have the inventory shipped from the vendor’s
warehouse to Esperado’s showroom.
November 27 Sold 23 pairs of lamps to Middletown Company at a price of $25,080 per pair.
November 30 An actual count of inventory was carried out which revealed that there were 15
pairs of the “Italia” brand in the warehouse.
December 2 In preparation for the festive season, Esperado purchased 25 pairs of lamps at a
total cost of $474,500.
December 15 5 pairs of the lamps purchased on December 2 were returned to the supplier, as
they were not of the brand ordered.
December 30 Sold 22 pairs of lamps to two customers (Omega Traders & Middleton
Furnishings) at a selling price of $26,550 per pair.
All purchases were on account and received on the dates stated.
Required:
i) Prepare a perpetual inventory record for Esperado Furnishings, using the first in, first
out (FIFO) method to determine the value of ending inventory at December 31, 2018, and the
total amount to be assigned to cost of goods sold for the period. (22 marks)
ii) Given that selling, distribution and administrative costs for the quarter were $23,445, $10,250
and$75,435 respectively, prepare an income statement for Esperado Furnishings for the
period, to determine the net profit for the quarter, assuming the perpetual inventory
system. (6 marks)
iii) You are told that 8 pairs of lamps sold on November 27, 2018 were on account. State the
journal entries necessary to record the transactions on November 12 and November 27,
assuming the business uses a: - Perpetual inventory system
- Periodic inventory system (7 marks)
iv) Assuming that Esperado sold 86 pairs of “Italia” brand of lamps during the quarter; determine
the value of ending inventory and cost of goods sold assuming the business used the periodic
system and the LIFO method?

Answer 1

i) Under Perpetual inventory system, inventory is recorded on a continuous basis and under FIFO, it is assumed that items which come first in the inventory are the first to be issued/sold (First In First Out). Accordingly, schedule of inventory as per FIFO under perpetual inventory system is prepared as below:

Working notes:

1. On Oct 1,2018 balance 10 pairs @ $16,820 per pair is recorded. When 15 pairs are purchased on Oct. 5,2018, same are recorded in inventory. When 18 pairs are sold on Oct 14, earlier inventory of 10 pairs is used first based on FIFO principle and balance 8 pairs are used from the later purchased stock,i.e., stock purchased on Oct.5.
2. Purchase price per pair on Oct. 22 = $18,175 less 4% = $17,448
3. Physical verification on Nov.30 reveals 15 pairs while as per schedule inventory is of 13 pairs, so it is assumed that 2 pairs were less recorded at the beginning of the quarter. Hence, 2 pairs are recorded @ $16,820 per pair.
4. On Dec. 15, 5 pairs returned from those bought on Dec. 2 are mentioned in Issues side but in red, since these are not goods sold but returns.

Date	Receipts			Issues			Balance
	Quantity	Unit Cost	Amount	Quantity	Unit Cost	Amount	Quantity	Unit Cost	Amount
Oct 1,2018	Balance						10	16820	168200
Oct 5,2018	15	17020	255300				10	16820	168200
							15	17020	255300
Oct 14,2018				10	16820	168200
				8	17020	136160	7	17020	119140
Oct 22,2018	24	17448	418752				7	17020	119140
							24	17448	418752
Nov 10,2018				7	17020	119140
				18	17448	314064	6	17448	104688
Nov 12,2018	30	17900	537000				6	17448	104688
							30	17900	537000
Nov 27,2018				6	17448	104688
				17	17900	304300	13	17900	232700
Nov 30,2018	2	16820	33640				2	16820	33640
							13	17900	232700
Dec 2,2018	25	18980	474500				2	16820	33640
							12	17900	214800
							25	18980	474500
Dec 15,2018				5	18980	94900	2	16820	33640
							12	17900	214800
							23	18980	436540
Dec 30,2018				2	16820	33640
				12	17900	214800
				8	18980	151840	15	18980	284700

Value of inventory as on Dec. 31, 2018 = 15 pairs @ $18,980 = $284,700

Cost of goods sold for the period (from the above schedule) = $168,200 + $136,160 + $119,140 + $314,064 + $104,688 + $304,300 + $33,640 + $214,800 + $151,840 = $1,546,832

ii)  

Sales
Date	Pairs	Unit price	Sales Amount
Oct. 14	18	$22,250	$400,500
Nov. 10	25		$589,750
Nov. 27	23	$25,080	$576,840
Dec. 30	22	$26,550	$584,100
Total sales			$2,151,190

Sales for the period          = $2,151,190

Less: Cost of Goods Sold = ($1,546,832 )

                                            --------------------

Gross Profit for the period = $604,358

Less: Selling costs               = ($23,445)

Less: Distribution costs     = ($10,250)

Less:Administrative costs = ($75,435)

                                         -------------------------------

Net income                 = $ 495,228

                                   -----------------------------------------

iii)

	Perpetual system
Date	Particulars	Debit amount	Credit amount
Nov. 12	Inventory	$528,360
	Accounts payable		$528,360
	(To record purchase of goods)
Nov. 12	Inventory	$8,640
	Accounts payable		$8,640
	(To record freight costs)
Nov. 27	Cost of goods sold	$408,988
	Inventory		$408,988
	(To record total cost of goods sold)
Nov. 27	Cash	$376,200
	Accounts receivables	$200,640
	Sales		$576,840
	(To record sales,8 on account and balance 15 on cash)

Notes: Cost of goods sold on Nov. 27 is from the schedule in part I above

Sales $576,840 = 23 pairs * $25,080 per pair.

	Periodic system
Date	Particulars	Debit amount	Credit amount
Nov. 12	Purchases	$537,000
	Accounts payable		$537,000
	(To record purchase of goods including freight costs)
Nov.27	Merchandise Inventory	$125,300
	Purchases		$125,300
	(To record balance inventory)
	Cost of goods sold	$411,700
	Purchases		$411,700
	(To record total cost of goods sold)
Nov. 27	Cash	$376,200
	Accounts receivables	$200,640
	Sales		$576,840
	(To record sales,8 on account and balance 15 on cash)

      Notes:

1. Purchases on Nov. 12 is recorded as 30 pairs * ($17,612 + $288)
2. Sales on Nov. 27 is recorded as 23 pairs * $25,080 (with bifurcation for cash sales and credit sales)
3. Quantity of merchandise inventory at the end = 30 pairs – 23 pairs = 7 pairs

Cost of merchandise inventory = 7 pairs * ($17,612+$288) = $125,300

Cost of goods sold = 23 pairs * ($17,612+ $288) = $411,700

iv) Please post part IV as a separate question due to lack of time and word constraint to answer.

Ending inventory = Beginning inventory + Purchases during the period - Cost of Goods Sold

Cost of goods sold = Beginning inventory + Purchases during the period - Ending inventory