Accrual Accounting, Cash Flow, and Fair Value
Computer Resources Inc. is a computer retailer. Computer Resources began operations in December of the current year and engaged in the following transactions during that month. Computer Resources uses a perpetual inventory system.
Dec. 5 | Purchased $100,000 of computer equipment, terms n/30. |
Dec. 12 | Sold $100,000 of computer equipment, terms n/30. The cost of the equipment sold is $50,000. |
Dec. 26 | Purchased $200,000 of computer equipment, terms n/30. |
Instructions
a. Compute the gross profit on Computer Resources’s transactions during December.
b. Compute the gross profit on Computer Resources’s transactions during 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 Computer Resources’s inventory at December 31 is $375,000. A potential lender asks Computer Resources to prepare a fair-value-based balance sheet. Prepare the journal entry to reflect inventory at fair value. Comment on how a retailer 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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