Question

Prepare an answer sheet with the column headings shown here. For each of the following transactions or adjustments, indicate the effect of the transaction or adjustment on the appropriate balance sheet category and on net income by entering for each account affected the account name and amount and indicating whether it is an addition () or a subtraction (-). Transaction a has been done as an illustration. Net Income is not affected by every transaction. In some cases only one column may be affected because all of the specific accounts affected by the transaction are included in that category a. Accrued Interest revenue of $30 on a note receivable. b. Pald $2,900 in cash as an advance rent payment for a short-term lease that covers the next four months. c. Recorded an adjustment at the end of the first month (in b) to show the amount of rent used in the month d. Inventory was acquired on account and recorded for $920. Perpetual Inventory is maintained. e. It was later determined that the amount of inventory acquired on account (ind) was erroneously recorded. The actual amount purchased was only $290. No payments have been made. Record the correction of this error. 1. Purchased 24 units of inventory at a cost of $48 each and then 16 more units of the same inventory item at $52 each. Perpetual Inventory is maintained. g. Sold 28 of the items purchased (in ) for $78 each and received the entire amount in cash. Record the sales transaction and the cost of goods sold using the LIFO cost flow assumption. Perpetual inventory is maintained. h. Assume the same facts (ing) except that the company uses the FIFO cost flow assumption Record only the cost of goods sold. 1. Assume the same facts (ing) except that the company uses the weighted average cost flow assumption Record only the cost of goods sold. (Do not round your intermediate calculation.) Current Liabilities Stockholders' Equity Net Income Interest revenue +30 Transaction Current Assets a. Interest receivable +30 b. Cash -2.900 Prepaid rent +2,900 Prepaid rent-725 d. inventory 920 e. inventory-630 Cash -1,984 inventory - 1,984 g. Sales 2.184 Cost of goods sold - 1.408 h. Cost of goods sold -1,360 Rent expense-725 Accounts payable -920 Accounts payable-630 1.

Answer 1

Transaction	Current assets	Current liabilities	Stockholders' equity	Net income
a.	Interest receivable +30			Interest revenue +30
b.	Cash - 2900
	Prepaid rent +2900
c.	Prepaid rent -725			Rent expense -725
d.	Inventory +920	Accounts payable +920
e.	Inventory -630	Accounts payable -630
f.	Inventory +1984
	Cash -1984
g.	Cash +2184			Sales +2184
				Cost of goods sold -1408
h.				Cost of goods sold -1360
i				Cost of goods sold -1388.8

Working notes:

a. The entry will be Interest receivable (Current asset) debit with $30 and interest revenue (revenue) credit with $30.

b. The entry will be prepaid rent (Current asset) debit with $2,900 and cash(current asset) credit with $2,900.

c. Prepaid rent $2,900 was for 4 months. So, one month’s rent = $2,900/4 = $725. One month’s expired prepaid rent means rent expense $725 will be recognized in income statement while calculating net income (net income will reduce), and prepaid rent (current asset) will be reduced by $725.

d. Inventory (current asset) will be debited by $920 and accounts payable (current liability) will be credited by $920.

e. The correct amount of inventory was $290 instead of $920. Therefore, inventory is overstated by $920-$290 = $630. Therefore, inventory(current asset) will be reduced by $630 and accounts payable(current liability) will be reduced by $630.

f. Total inventory purchased = (24units*$48)+(16units*$52) = $1,984. So, inventory (current asset) debited with $1,984 and cash (current asset) credited with $1,984.

g. Sale of 28 units at $78 each = 28*$78 = $2,184. Cash (current asset) will be debited with $2,184 and sales (revenue/net income) will be credited with $2,184. Further, for cost of goods sold, under LIFO, it is assumed that items purchased later are sold first. So, for sale of 28 units from inventory in point f. above, sales will consist of 16 units bought later + (28-16=12 units) from 24 units bought first. So, cost of goods sold = (16units*$52) +(12units * $48) = $1,408. Cost of goods sold reduces net income, hence recorded as reduction in net income.

h. Under FIFO, it is assumed that items purchased first are sold first. So, for sale of 28 units from inventory purchased in point f, 24 units will be sold first at $48 per unit, and balance (28-24 units = 4 units) will be sold from 16 units purchased later at $52. So, cost of goods sold will be (24 units*$48) + (4 units*$52) = $1,360.

i. Under weighted average cost method, weighted average cost price is calculated per unit of inventory purchased. So, considering only the inventories purchased in point f, total cost of inventories = $1,984. Further, total units purchased = 24+16 = 40 units. Weighted average cost per unit = $1,984/40 = $49.6. So, weighted average cost of 28 units sold = $49.6*28 = $1,388.80