Concept explainers
The following events and transactions relate to the purchase and use of supplies inventory for Jedville Township:
- 1. On March 21, 2019, supplies were ordered at an estimated cost of $847,000.
- 2. Supplies were received on April 4, 2019, and the actual cost of $850,000 was paid in cash.
- 3. On December 31, 2019, $70,000 in supplies remain. (Assume there was no beginning balance.)
- 4. On February 23, 2020, supplies were ordered at an estimated cost of $855,000.
- 5. Supplies were received on March 6, 2020, and the actual cost of $860,000 was paid in cash.
- 6. On December 31, 2020, $60,000 in supplies remain.
Required
- a. Prepare
journal entries to record the inventory transactions in Jedville’s General Fund using the consumption method of accounting for inventory. (Remember to prepare year-end adjusting and closing entries, if necessary.) - b. Prepare journal entries to record the inventory transactions in Jedville’s General Fund using the purchases method of accounting for inventory. (Remember to prepare year-end adjusting and closing entries, if necessary.)
- c. Prepare journal entries to record the inventory transactions in Jedville’s governmental activities ledger. (Remember to prepare year-end adjusting and closing entries, if necessary.)
- d. Compare the expenditure and expense account totals each year under the three methods.
- e. How will inventory balances be presented on the financial statements at the end of each year?
a.
Journalize the inventory transactions in Township J’s General Fund using consumption method.
Explanation of Solution
Consumption method: According this method, the expenditures of supplies are equal to the amount of supplies consumed in an year. The supplies, under consumption method, are accounted for by accrual basis at the government-wide level.
Journalize the inventory transactions in Township J’s General Fund using consumption method.
1.
Entry to record supplies ordered at an estimated cost:
General Ledger | |||
Debits | Credits | ||
General Fund: | |||
Encumbrances | $847,000 | ||
Encumbrances Outstanding | $847,000 |
Table (1)
2.
Entry to record receipt of supplies and payment of actual cost:
General Ledger | |||
Debits | Credits | ||
General Fund: | |||
Encumbrances Outstanding | $847,000 | ||
Encumbrances | $847,000 | ||
Inventory of Supplies | $850,000 | ||
Cash | $850,000 |
Table (2)
3.
Entry to record increase in beginning inventory and closing entry:
General Ledger | |||
Debits | Credits | ||
General Fund: | |||
Expenditures | $780,000 | ||
Inventory of Supplies | $780,000 | ||
Fund Balance–Unassigned | $70,000 | ||
Fund Balance–Nonspendable | $70,000 | ||
Fund Balance–Unassigned | $780,000 | ||
Expenditures | $780,000 |
Table (3)
4.
Entry to record supplies ordered at an estimated cost:
General Ledger | |||
Debits | Credits | ||
General Fund: | |||
Encumbrances | $855,000 | ||
Encumbrances Outstanding | $855,000 |
Table (4)
5.
Entry to record receipt of supplies and payment of actual cost:
General Ledger | |||
Debits | Credits | ||
General Fund: | |||
Encumbrances Outstanding | $855,000 | ||
Encumbrances | $855,000 | ||
Inventory of Supplies | $860,000 | ||
Cash | $860,000 |
Table (5)
6.
Entry to record decrease in beginning inventory and closing entry:
General Ledger | |||
Debits | Credits | ||
General Fund: | |||
Expenditures | $870,000 | ||
Inventory of Supplies | $870,000 | ||
Fund Balance – Nonspendable | $10,000 | ||
Fund Balance – Unassigned | $10,000 | ||
Fund Balance–Unassigned | $870,000 | ||
Expenditures | $870,000 |
Table (6)
b.
Journalize the inventory transactions in Township J’s General Fund using purchases method.
Explanation of Solution
Purchases method: According this method, the expenditures of supplies are equal to the amount of supplies purhcased in an year. The supplies, under purchases method, are accounted for by modified accrual basis in the General Fund.
Journalize the inventory transactions in Township J’s General Fund using purchases method.
1.
Entry to record supplies ordered at an estimated cost:
General Ledger | |||
Debits | Credits | ||
General Fund: | |||
Encumbrances | $847,000 | ||
Encumbrances Outstanding | $847,000 |
Table (7)
2.
Entry to record receipt of supplies and payment of actual cost:
General Ledger | |||
Debits | Credits | ||
General Fund: | |||
Encumbrances Outstanding | $847,000 | ||
Encumbrances | $847,000 | ||
Expenditures | $850,000 | ||
Cash | $850,000 |
Table (8)
3.
Entry to record increase in beginning inventory and closing entry:
General Ledger | |||
Debits | Credits | ||
General Fund: | |||
Inventory of Supplies | $70,000 | ||
Fund Balance–Nonspendable | $70,000 | ||
Fund Balance–Unassigned | $850,000 | ||
Expenditures | $850,000 |
Table (9)
4.
Entry to record supplies ordered at an estimated cost:
General Ledger | |||
Debits | Credits | ||
General Fund: | |||
Encumbrances | $855,000 | ||
Encumbrances Outstanding | $855,000 |
Table (10)
5.
Entry to record receipt of supplies and payment of actual cost:
General Ledger | |||
Debits | Credits | ||
General Fund: | |||
Encumbrances Outstanding | $855,000 | ||
Encumbrances | $855,000 | ||
Expenditures | $860,000 | ||
Cash | $860,000 |
Table (11)
6.
Entry to record decrease in beginning inventory and closing entry:
General Ledger | |||
Debits | Credits | ||
General Fund: | |||
Fund Balance–Nonspendable | $10,000 | ||
Inventory of Supplies | $10,000 | ||
Fund Balance–Unassigned | $860,000 | ||
Expenditures | $860,000 |
Table (12)
c.
Journalize the inventory transactions in Township J’s governmental activities ledger.
Explanation of Solution
Journalize the inventory transactions in Township J’s governmental activities ledger.
1.
Entry to record supplies ordered at an estimated cost: Entry is not required.
2.
Entry to record receipt of supplies and payment of actual cost:
General Ledger | |||
Debits | Credits | ||
Governmental Activities: | |||
Inventory of Supplies | $850,000 | ||
Cash | $850,000 |
Table (13)
3.
Entry to record increase in beginning inventory and closing entry:
General Ledger | |||
Debits | Credits | ||
Governmental Activities: | |||
Expenses | $780,000 | ||
Inventory of Supplies | $780,000 | ||
Net Position | $780,000 | ||
Expenses | $780,000 |
Table (14)
4.
Entry to record supplies ordered at an estimated cost: Entry is not required.
5.
Entry to record receipt of supplies and payment of actual cost:
General Ledger | |||
Debits | Credits | ||
Governmental Activities: | |||
Inventory of Supplies | $860,000 | ||
Cash | $860,000 |
Table (15)
6.
Entry to record decrease in beginning inventory and closing entry:
General Ledger | |||
Debits | Credits | ||
Governmental Activities: | |||
Expenses | $870,000 | ||
Inventory of Supplies | $870,000 | ||
Net Position | $870,000 | ||
Expenses | $870,000 |
Table (16)
d.
Indicate the relation between the totals of expenditure and expense accounts, under purchases method, consumption method, and governmental activities.
Explanation of Solution
Comparison: The total inventory used was $780,000 during 2019 and $870,000 during 2020, under both the consumption method (accrual accounting method), and purchases method (modified accrual accounting). The expenditures were $850,000 in 2019, and $860,000 in 2020 under purchases method. The total expenditures for inventory is compared to the appropriations of the year.
e.
Show the presentation of inventory balances on the financial statements at the end of the year.
Explanation of Solution
Presentation: The balance of Supplies Inventory would be $70,000 in 2019 and $60,000 and 2020, under both the methods. These amounts will be reported as Fund Balance–Nonspendable in the governmental funds. These values are not described at the government-wide level.
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Chapter 4 Solutions
Accounting For Governmental & Nonprofit Entities
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