Question

Comprehensive cycle problem: perpetual system

At the beginning of Year 2, the Redd Company had the following balances in its accounts:

Cash	$ 6,900
Inventory	15,000
Land	7,000
Common stock	15,000
Retained earnings	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 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.

Required

1.     Record the events in general journal format.

2.    Open ledger T-accounts, and post the beginning balances and the events to the accounts.

3.    Prepare a multistep income statement, a statement of changes in stockholders’ equity, a balance sheet, and a statement of cash flows.

4.    Use a single general journal to close all revenue, gain, and expense accounts to the retained earnings account. Post the journal entry to the ledger accounts and prepare a post-closing trial balance.

Answer 1

a) Prepare the fournal entries as shown below: Date Account title and explanation Ref DebitCredit Merchandise inventory $190 (S5,200+ $5,390 Accounts payable Cash $5,200 $190 To record the puchase of merchandise nventory on credit and freight paid in cash, Merchandise invento $400 Accounts payable lo record the damaged merchandse returned) $400 Accounts payable (S5,200 $400) $4,800 Cash $4,752 $48 Purchase discount ($4,800 x 1% lo record the payment of balance due net of discount) Accounts receivable $12,100 Sales revenue (To record the sale of inventory on credi) $12,100 Cost of goods sold $6,800 Merchandise mvento (To record the cost of merchandise nventory sold) S6,800 Sales retums and allowances $1.680 Accounts receivable (To record the merchandise returned by customer) $1.680

Merchandise invento $900 Cost of goods sold lo record the cost of mechandise retumed by customer) $900 Accounts receivable $140 Cash lo record the freight charges paid oin behalf of customer under the FOB dest ination sale) $140 Cash ($10,420 - $208+ $140) Sales discounts ($ 10,420 × 290 $10,352 $208 Accounts receivable $1,680 +$140 o record the freight charges paid orn ($12,100- $10,560 (l behalf of customer under the FOB dest ination sale) Cash $8,500 $7,000 $1,500 Land Gam on sale ofland (lo o record the sale of land for gan ) Interest receivable $600 Interest income (To record the nterest ncome earned but not received) $600 Cost of goods sold $690 Merchandise mventory lo record the loss of merchandise nventory) $690

Particulars Amount stock $15,000 $5,390 S400) ($6,800) Cost of invento Cost of inventory returned Cost of inventory sold Cost of inventory returned by customer$900 Cost of inventory as per Less: Cost of inventory as per physical count Loss of inventor rchased books $14,090 $13.400 S690 2 Prepare the T accounts as shown below: Cash account Cash Jourmal Ref Balance Date Item Debit Credit Debit Credit Opening balance Merchandise Accounts payable Accounts receivable Accounts receivable Land Gan on sale of and $6,900 $190$6,710 $4,758$1,952 $140 $1,812 $12,164 $19,164 $20,664 $10,352 $7,000 $1,500

Merchandise inventorv account: Merchandise Inventorv Joumal Balance Date Item Ref Debit CreditDebit Credit Opening balance Accounts payable Cash Accounts payable Cost of goods sold Cost of goods sold Cost of goods sold $15,000 $5.200 $190 $15,000 $20.200 $20,390 $400 $19,990 $6,800 $13,190 $14,090 $690 $13.400 $900 Land account: Land Joumal Balance Date Item Debit CreditDebit Credit $7,000 $0 balance $7,000 Cash $7,000 Accounts payable account: Accounts payable Jourmal Balance Date Item Debit Credit Debit Credit Merchandise inventory Merchandise inventory Cash Purchase discount $5.200 $4,800 $48 $0 $5.200 $400 $4.752 $48

Accounts receivable account: Accounts receivable Jourmal Balance Date Item Ref DebitCredit Debit Credit Sales revenue Sales returns and allowances Cash Cash Sales discounts $12,100 $12,100 $1,680 $10,420 $10,560 $10,352$208 S0 $140 2

Sales revenue account: Sales revenue Joumal Balance Date Item Debit CreditDebit Credi Accounts receivable $12,100 $12,100 Cost of goods sold acc ount: Cost of goods s old Jourmal Balance Date Item Debit Credit Debit Credit Merchandise inventory Merchandise invento Merchandise $6,800 $6,800 $900 $5,900 $6.590 $690 Sales returns and allowances account: Sales retums and allowances Joumal Balance Date Item Ref Debit CreditDebit Credit Accounts receivable Accounts receivable $1,680 $208 $1,680 $1,888

Purchase discount account: Purchase discounts Joumal Balance Date Item Ref Debit Credt DebitCredit Accounts payable $48 $48 Accrued interest income account: Accured interest income Joumal Balance Date Item Ref Debit Credt DebitCredit Interest reveme $600 $600 Common stock account: Common stock Jourmal Balance Date Item RefDe Debit CreditDebitCredit Opening balance $15.000 $15,000 Retained earnin gs account: Retained earnings Joumal Balance Date Item Ref Debit Credit Debit Credit Openng baance $13,900 $13,900

Gain on sale of land account: Gain on sale of land Joumal Balance Date Item RefDebit CreditDebit Credit Cash $1,500 $1,500 Interest revenue account: Interest revenue Jourmal Balance Date RefDebit CreditDebitCredit Interest receivable $600 $600

Prepare the multi-step income statenent: D Company Multi-step income statement For the vear ended December 31, 2016 Particulars Amount Sales revenue Less: Cost of goods sold Gross profit $12,100 $6.590 $5,510 Operating expenses Sal es returns and allowances Purchase discount Total operating expenses $1,888 ($48) $1,840 ating income $3,670 Non-operating incomes/expenses Interest revenue Gain on sale of Land Total non-operatin Net income from continuing Less: Income tax $600 $1,500 $2,100 $5.770 SO rations before tax Discontinued operations SO $O Extra-ordinary item Total extra-ordinary item Net income (a) Number of shares of common stock outstandin Earning per share (a) - (b)

R Company Statement of stockholder's equity As on December 31, 2016 Particulars Amount Capital stock Common stock $15,000 Additional paid-in capital Total paid-in capital $15,000 Retained earnings ($13,900 + $5,770) Less: Treasury stock Total stockholder's equity $19,670 S0 $34,670

Prepare the classified balance sheet: R Company Classified Balance sheet As on December 31, 2016 Assets Current assets Cash Merchandise invento Accrued interest income $20,664 $13,400 $600 Total current assets $34,670 Property, plant and equipment an Intangible assets Total assets Liabilities and owner's Equit Current liabilities $0 Total current liabilities S0 Long-term liabilities Total liabilities Ow ner's equity Common stock Retained earings $15,000 $19,670 Total liabilities and Owner's equity $34,670

Prepare the statem ent of cash flows R Company Statement of cash flows For the month Ended December 31, 2016 Particulars Amount Cash flows from operating activities Net income Less: G Decrease in inventory Increase in accrued interest income $5,770 $1,500) $1,600 ($600) ain on sale of land Net cash flows from operating activities S5,270 Cash flows from investing activities Receipts from sale of land Net cash flows from investing activities $8,500 S8,500 Cash flows from financing activities Net cash flows from financing activities Net increase in cash during July Cash balance, July 1, 2016 Cash balance, July 31, 2016 S0 S13,770 S6,900 S20,670

Answer 2

Prepare the effect of events on financial statements as follows: Balance Sheet Income Statement Stk. Liabilities + Equity ΝΑ AS NA NA NA NA Revenue - Expenses = Net Income ΝΑ ΝΑ ΝΑ NA ΝΑ ΝΑ ΝΑ ΝΑ ΝΑ NA ΝΑ NA NA Statement of Cash Flows ΝΑ ΝΑ ΟΑ NA ΝΑ ΝΑ ΝΑ ΟΑ ΝΑ NA ΟΑ ΝΑ ΟΑ Η + NA Event No. Event Type Assets 1a. 1b. AE AU 3a. Disc, AU 3b, Pay, AU 4a. Sale AS 4b. Cost AU 5a. Ret Rev AU 5b. Ret Cost AS 6. Frt. AU 7a. Disc, AU 7b. Coll. AE 8. Land AE 9. Int. AS 10. Adj. AU . NA + NA ΝΑ NA ΝΑ NA ΝΑ ΝΑ NA NA ΟΑ 2 + + NA ΙΑ NA ΝΑ ΝΑ ΝΑ