Question

LO7-17-2,74,7-5 Recording Inventory Transactions, Computing Ending Inventory and Cost of Sales, and Determining the Effects of LC&NRV Rule on the Inventory Turnover Ratio (P7-8) Chaiz Inc. specializes in importing furniture for commercial use. Chaiz reported the following information (all transactions are on account) for the quarter ending September 30, 2018: AP7-4 Date Transaction Units Amount per Unit July 1 July 13 July 29 August 3 August 16 September 21 Inventory 224 $36.0 Purchase 152 35.5 Sale 242 49.5 Purchase 112 34.5 Purchase 204 32.5 Sale 134 49.0 Chaiz uses the perpetual inventory system and the FIFO method for inventory costing. Required: 1. Prepare journal entries to record the transactions on July 13 and July 29. 2. Compute the cost of ending inventory at September 30, 2018, and the cost of sales, gross profit, and gross profit percentage for the quarter ending September 30, 2018. 3. Would Chaiz's gross profit increase or decrease if it uses the weighted-average cost method instead of FIFO? Explain without re-computing the gross profit. 4. Chaiz is required to report its ending inventory at the lower of cost and net realizable value. The net realizable value of chairs decreased to $33 per unit on September 30, 2018. Prepare the adjusting entry to reflect the application of the LC&NRV rule. 5. Assume that Chaiz's accountant did not apply the LC&NRV rule, and that the company inventory turnover for the quarter ended September 30, 2018, is 1.45. Re-compute the inventory turnover using the correct value for ending inventory. LO7S1

Answer 1

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Part 1
Date	Account	Debit	Credit
Jul 13	Inventory	$     5,396
	Accounts Payable		$       5,396
Jul 29	Accounts Receivable	$   11,979
	Sales		$     11,979
Part 2
	Purchases			Cost of Goods Sold			Ending Inventory
Date	Unit	Unit Cost	Total Cost	Unit	Unit Cost	Total Cost	Unit	Unit Cost	Total Cost
Jul 1							224	$    36.00	$     8,064
Jul 13	152	$     35.50	$           152				224	$    36.00	$     8,064
							152	$    35.50	$     5,396
Jul 29				224	$    36.00	$     8,064	-	$    36.00	$            -
				18	$    35.50	$         639	134	$    35.50	$     4,757
Aug 3	112	$     34.50	$       3,864				134	$    35.50	$     4,757
							112	$    34.50	$     3,864
Aug 16	204	$     32.50	$       6,630				134	$    35.50	$     4,757
							112	$    34.50	$     3,864
							204	$    32.50	$     6,630
Sep 21				134	$    35.50	$     4,757	112	$    34.50	$     3,864
							204	$    32.50	$     6,630
	Cost of Godos Sold			376		$   13,460
	Ending Inventory						316		$   10,494
	Sales		$     18,545
	(242*$49.5)+(134*$49)
	Less: COGS		$ (13,460)
	Gross Profit		$       5,085
Part 3	Gross profit will increase as COGS will be lower.
	Since purchase cost is reducing with every purchase, and hence average cost per unit will be lower than previous purchase
Part 4
	Units	Cost	NRV	Lower	Diff	Total
	112	$     34.50	$       33.00	$    33.00	$    (1.50)	$       (168)
	204	$     32.50	$       33.00	$    32.50	$       0.50	$         102
						$         (66)
Dec 31	Cost of Goods Sold	$           66
	Allowance for write down of inventory to NRV		$             66
Part 5
	Cost of Goods Sold	a	$     13,460
	Beginning Inventory (224*$36)		$       8,064
	Ending Inventory ($10,494-$66)		$     10,428
	Average Inventory	b	$       9,246
	Inventory Turnover Ratio	a/b	1.46