Question

Howard, Inc. is a merchandising company that began operations on January 1, 2019. During January, the following inventory transactions occurred:

January Transactions:

Jan.11 Howard purchased merchandise on account for $12,000.

15 Howard returned some of the merchandise purchased on Jan. 11, and the supplier credited Howard’s account. The cost of the merchandise returned was $700.

20 Howard sold merchandise that cost $3,500 for $5,000 in cash.

Required:

1.Assume that Howard uses a perpetual inventory system. Prepare the journal entries to record the January inventory transactions.

2.Assume that Howard uses a periodic inventory system. Prepare the journal entries to record the January inventory transactions. Be sure to include any adjusting entries necessary.

3.Next Level  Howard’s CEO states that a perpetual inventory system would result in a better inventory valuation. Evaluate this statement and provide a discussion of the benefits of each type of inventory system.

CHART OF ACCOUNTS
Howard, Inc.
General Ledger
ASSETS 111 Cash 121 Accounts Receivable 141 Inventory 142 Allowance for Inventory Valuation 152 Prepaid Insurance 181 Equipment 198 Accumulated Depreciation LIABILITIES 211 Accounts Payable 231 Salaries Payable 241 Accrued Loss on Purchase Commitment 251 Unearned Revenue EQUITY 311 Common Stock 331 Retained Earnings	REVENUE 411 Sales Revenue EXPENSES 500 Cost of Goods Sold 510 Purchases 511 Purchase Returns and Allowances 512 Purchase Discounts Taken 513 Purchase Discounts Lost 514 Loss on Purchase Commitment 515 Recovery of Accrued Loss on Purchase Commitment 521 Insurance Expense 522 Utilities Expense 523 Salaries Expense 524 Bad Debt Expense 540 Interest Expense 541 Depreciation Expense 559 Miscellaneous Expenses

1. Assume that Howard uses a perpetual inventory system. Prepare the journal entries to record the January inventory transactions.

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2
3
4
5
6
7
8

2. Assume that Howard uses a periodic inventory system. Prepare the journal entries to record the January inventory transactions. Be sure to include any adjusting entries necessary.

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2
3
4
5
6
7
8
9
10

Howard’s CEO states that a perpetual inventory system would result in a better inventory valuation. Evaluate this statement and provide a discussion of the benefits of each type of inventory system.

The CEO’s statement is   . The valuation of ending inventory is generally     between the perpetual and periodic systems. Periodic inventory systems are relatively     to operate; however, the cost of operating a perpetual inventory system is rapidly   . A perpetual inventory system provides management with     timely and     information and, therefore,     control over inventory than a periodic inventory system.

Answer 1

		PERPETUAL INVENTORY SYSTEM
	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
	.Jan 11	Inventory		$12,000
		Accounts Payable			$12,000
	.Jan 15	Accounts Payable		$700
		Inventory			$700
	.Jan 20	Cash		$5,000
		Sales Revenue			$5,000
		Cost of goods sold		$3,500
		Inventory			$3,500
		PERIODIC INVENTORY SYSTEM
	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
	.Jan 11	Purchases		$12,000
		Accounts Payable			$12,000
	.Jan 15	Accounts Payable		$700
		Purchase Returns and Allowances			$700
	.Jan 20	Cash		$5,000
		Sales Revenue			$5,000
		Perpetual Inventory System records inventory at every transaction
		Closing inventory can be found out at any point of time
		Periodic Inventory system calculates closing inventory at end of period only.