Question

Great Adventures Problem 6-1

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Now that operations for outdoor clinics and TEAM events are running smoothly, Suzie thinks of another area for business expansion. She notices that a few clinic participants wear multiuse (MU) watches. Beyond the normal timekeeping features of most watches, MU watches are able to report temperature, altitude, and barometric pressure. MU watches are waterproof, so moisture from kayaking, rain, fishing, or even diving up to 100 feet won’t damage them. Suzie decides to have MU watches available for sale at the start of each clinic. The following transactions relate to purchases and sales of watches during the second half of 2019. All watches are sold for $298 each.

  

Jul. 17 Purchased 48 watches for $7,104 ($148 per watch) on account.
Jul. 31 Sold 38 watches for $11,324 cash.
Aug. 12 Purchased 38 watches for $6,004 ($158 per watch) cash.
Aug. 22 Sold 28 watches for $8,344 on account.
Sep. 19 Paid for watches ordered on July 17.
Sep. 27 Received full payment for watches sold on account on August 22.
Oct. 27 Purchased 78 watches for $13,104 ($168 per watch) cash.
Nov. 20 Sold 88 watches for $26,224 cash.
Dec. 4 Purchased 116 watches for $20,648 ($178 per watch) cash.
Dec. 8 Sold 38 watches for $11,324 on account.

Required:

1-a. Calculate sales revenue, cost of goods sold, and ending inventory as of December 31, 2019, assuming Suzie uses FIFO to account for inventory.

1-b. Prepare the gross profit section of a partial income statement for transactions related to MU watches.

2. Late in December, the next generation of multiuse (MU II) watches is released. In addition to all of the features of the MU watch, the MU II watches are equipped with a global positioning system (GPS) and have the ability to download and play songs and videos off the internet. The demand for the original MU watches is greatly reduced. As of December 31, the estimated net realizable value of MU watches is only $98 per watch.

a. Record any necessary adjustment on December 31, 2019, related to this information.(If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

b. For what amount would MU inventory be reported in the December 31, 2019, balance sheet?

c. Prepare an updated gross profit section of a partial income statement accounting for this additional information.

Answer 1

Ans 1a First in, first out method (FIFO): In this method it is assumed that inventory which is purchased first will be sold first and the inventory will consist of recent purchases. Cost of Goods Sold Date July 17 Aug'12 Oct 27 Dec 4 Ending i Date Dec 4 Unit Rate Amount Unit Rate Amount $148 $158 $168 5178 $7,104 $6,004 513,104 $4,984 $31,196 88 $178 $15,664 48 38 78 28 192 $15,664 Great Adventures Income Statement (Partial Ans 1b Particulars Sales Less Cost of Good Sold Gross Profit Amount 57,216 (531,196 $26,020 Ans 2a LCM/NRV: It means lower of cost or market value. Inventory is be valued at lower of the cost or market value Unit Particulars Ending inventory at cost Net Realizable value The Value of the ending inventory will be reduced by [$15664-$8624] 57040 and will be reported at $8624 Rate Amount $178 $15,664 98 $8,624 Ans 2b MU inventory be reported in the December 31, 2019, balance sheet at $8624 Ans 2c Great Adventures Income Statement (Partial Particulars Sales Less Cost of Good Sold Less: Loss in Inventory value (S7,040) Gross Profit 57,216 ($31,196) $18,980