Question

Cheyenne Corp. had the following account balances at year-end: Cost of Goods Sold $61,510; Inventory $15,140; Operating Expenses $32,040; Sales Revenue $126,180; Sales Discounts $1,500; and Sales Returns and Allowances $1,940. A physical count of inventory determines that merchandise inventory on hand is $12,750.

Prepare the adjusting entry necessary as a result of the physical count. Prepare the closing entries.

Answer 1

ADJUSTING ENTRY

DATE	GENERAL JOURNAL	DEBIT	CREDIT
	Cost of Goods Sold	$2,390
	Inventory		$2,390

NOTE: Inventory value to be reduced = Inventory as per records - Inventory as per Physical Count

=$15,140 - $12,750

=$2,390

Inventor's account normal balance is debit. As the physical count is less than ledger value of inventory account, it is credited and cost of goods sold is debited.

CLOSING ENTRIES

DATE	GENERAL JOURNAL	DEBIT	CREDIT
	Sales Revenue	$126,180
	Income Summary		$126,180
	(closing the sales revenue account )
	Income Summary	$99,380
	Cost of Goods Sold ($61,510 + $2,390)		$63,900
	Sales Discounts		$1,500
	Sales Returns and Allowances		$1,940
	Operating Expenses		$32,040
	(closing the other various accounts of debit balance)
	Income Summary ($126,180-$99,380)	$26,800
	Retained Earnings		$26,800
	(to close net income)

As credit to income summary account is more than debit to income summary account, it is considered as net income and closed to retained earnings account by debiting income summary account

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