Accrual Accounting, Cash Flow, and Fair Value
Genuine Accessories Inc. is a wholesaler of automobile and truck accessories. Genuine Accessories began operations in November of the current year and engaged in the following transactions during November and December of this year. Genuine Accessories uses a perpetual inventory system.
Nov. 3 | Purchased $400,000 of automotive accessories, terms n/30. |
Nov. 15 | Sold $300,000 of automotive accessories, terms n/60. The cost of the accessories sold is $200,000. |
Nov. 28 | Purchased $600,000 of automotive accessories, terms n/45. |
Dec. 3 | Settled the $400,000 purchase of November 3. |
Dec. 15 | Sold $750,000 of automotive accessories, terms n/60. The cost of the accessories sold is $500,000. |
Dec. 27 | Purchased $900,000 of automotive accessories, terms n/30. |
Instructions
a. Compute the gross profit on Genuine Accessories’s transactions during November and December.
b. Compute the gross profit on Genuine Accessories’s transactions during November and December if a cash-basis accounting system was used.
c. Explain the difference between the results in a and b.
d. Assume that the fair value of Genuine Accessories’s inventory at December 31 is $ 1,500,000. A potential lender asks Genuine Accessories to prepare a fair-value-based balance sheet. Prepare the journal entry to reflect inventory at fair value. Comment on how a wholesaler might determine fair value for inventory items. [Hint: Increase the Inventory account by the difference between fair value and book value with the offset to an account titled Revaluation of Inventory to Market Value.]
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