(a)
Periodic Inventory System: It is a system in which the inventory is updated in the accounting records on a periodic basis such as at the end of each month, quarter or year. In other words, it is an accounting method which is used to determine the amount of inventory at the end of each accounting period.
Perpetual Inventory System refers to the inventory system that maintains the detailed records of every inventory transactions related to purchases and sales on a continuous basis. It shows the exact on-hand-inventory at any point of time.
To Record: The
(a)
Explanation of Solution
Record the transaction for the month December, 2017.
Date | Account Title and Explanation | Post Ref. | Debit($) | Credit($) |
December 3, 2017 | Inventory (A+) | 2,880 (1) | ||
Accounts Payable (L+) | 2,880 | |||
(To record the purchase of inventory on account) | ||||
December 5, 2017 |
| 3,960 (2) | ||
Sales Revenue (E+) | 3,960 | |||
(To record the revenue rendered on account) | ||||
Cost of goods sold (E–) | 2,808 (3) | |||
Inventory (A–) | 2,808 | |||
(To record a credit sale and the cost of credit sale) | ||||
December 7, 2017 | Sales Return and Allowances (E–) | 180 | ||
Accounts Receivables (A–) | 180 | |||
(To record returned of inventory) | ||||
Inventory (A+) | 144 | |||
Cost of goods sold (E+) | 144 | |||
(To record a credit sale and the cost of credit sale) | ||||
December 17, 2017 | Inventory (A+) | 1,760 (4) | ||
Cash (A–) | 1,760 | |||
(To record the purchase of inventory by cash) | ||||
December 22, 2017 | Accounts Receivable(A+) | 1,900 | ||
Sales Revenue (E+) | 1,900 (5) | |||
(To record the revenue rendered on account) | ||||
Cost of goods sold (E–) | 1,440 (6) | |||
Inventory (A–) | 1,440 | |||
(To record a credit sale and the cost of credit sale) | ||||
December 31, 2017 | Salaries and Wages Expense (E –) | 400 | ||
Salaries and Wages Payable (L+) | 400 | |||
(To record the amount of accrued salaries for the month.) | ||||
December 31, 2017 |
| 200 | ||
Accumulated Depreciation (A–) | 200 | |||
(To record the amount of depreciation for the month) | ||||
December 31, 2017 | Income tax expense (E–) | 215 | 215 | |
Income tax payable (L+) | ||||
(To record income tax expense for the year) |
Table (1)
Working Notes:
Calculate the amount of inventory on December 3.
Calculate the amount of accounts receivable on December 5.
Calculate the amount of cost of goods sold on December 5.
Calculate the amount of purchase of inventory on December 17.
Calculate the amount of sales revenue on December 22.
Calculate the amount of cost of goods sold on December 22.
(b)
T Accounts: T- accounts are prepared for all the business transactions. First, journal entries are passed and then transferred to the respective ledger accounts where, they are recorded and summarized in either side of the ‘T’ format. It is divided into two parts by a vertical line, that is, the left side and the right side. The left side of the T-account is known as the debit side and the right side of the T-account is known as the credit side. The account name appears on the top of the T-account.
To Prepare: The ledger account for the above transactions recorded.
(b)
Explanation of Solution
Cash Account
Date | Particulars | Debit | Date | Particulars | Credit |
($) | ($) | ||||
December | Opening balance | 4,800 | December | Inventory | 1,760 |
1 | 17 | ||||
December | Ending balance | 3,040 | |||
31 |
Table (2)
Inventory Account
Date | Particulars | Debit | Date | Particulars | Credit |
($) | ($) | ||||
December | Opening balance | 1,800 | December | Cost of goods sold | 2,808 |
1 | 5 | ||||
December | Accounts payable | 2,880 | December | Cost of goods sold | 1,440 |
3 | 22 | ||||
December | Cost of goods sold | 144 | |||
7 | |||||
December | Cash | 1,760 | |||
17 | |||||
December | Ending balance | 2,336 | |||
31 |
Table (3)
Equipment Account
Date | Particulars | Debit | Date | Particulars | Credit |
($) | ($) | ||||
December | Ending balance | 21,000 | |||
31 |
Table (4)
Accumulated Depreciation
Date | Particulars | Debit | Date | Particulars | Credit |
($) | ($) | ||||
December | Opening balance | 1,500 | |||
1 | |||||
December | Depreciation expense | 200 | |||
31 | |||||
December | Ending balance | 1,700 | |||
31 |
Table (5)
Accounts Payable Account
Date | Particulars | Debit | Date | Particulars | Credit |
($) | ($) | ||||
December | Opening balance | 3,000 | |||
1 | |||||
December | Inventory | 2,880 | |||
5 | |||||
December | Ending balance | 5,880 | |||
31 |
Table (6)
Salaries and Wage Payable Account
Date | Particulars | Debit | Date | Particulars | Credit |
($) | ($) | ||||
December | Opening balance | 400 | |||
1 | |||||
December | Ending balance | 400 | |||
31 |
Table (7)
Cost of Goods Sold Account
Date | Particulars | Debit | Date | Particulars | Credit |
($) | ($) | ||||
December | Inventory | 2,808 | December | Inventory | 144 |
5 | 7 | ||||
December | Inventory | 1,440 | |||
22 | |||||
December | Ending balance | 4,104 | |||
31 |
Table (8)
Depreciation Account
Date | Particulars | Debit | Date | Particulars | Credit |
($) | ($) | ||||
December | Opening balance | 200 | |||
1 | |||||
December | Ending balance | 200 | |||
31 |
Table (9)
Common Stock Account
Date | Particulars | Debit | Date | Particulars | Credit |
($) | ($) | ||||
December | Opening balance | 10,000 | |||
1 | |||||
December | Ending balance | 10,000 | |||
31 |
Table (10)
Date | Particulars | Debit | Date | Particulars | Credit |
($) | ($) | ||||
December | Opening balance | 17,000 | |||
1 | |||||
December | Ending balance | 17,000 | |||
31 |
Table (11)
Sales Revenue Account
Date | Particulars | Debit | Date | Particulars | Credit |
($) | ($) | ||||
December | Accounts receivable | 3,960 | |||
5 | |||||
December | Accounts receivable | 1,900 | |||
22 | |||||
December | Ending balance | 5,860 | |||
31 |
Table (12)
Salaries and Wage Expense Account
Date | Particulars | Debit | Date | Particulars | Credit |
($) | ($) | ||||
December | Salaries and wage payable | 400 | |||
31 | |||||
December | Ending balance | 400 | |||
31 |
Table (13)
Sales Return and Allowances Account
Date | Particulars | Debit | Date | Particulars | Credit |
($) | ($) | ||||
December | Opening balance | 180 | |||
1 | |||||
December | Ending balance | 180 | |||
31 |
Table(14)
Accounts Receivable Account
Date | Particulars | Debit | Date | Particulars | Credit |
($) | ($) | ||||
December | Opening balance | 3,900 | December | Sales return and allowances | 180 |
1 | 7 | ||||
December | Sales revenue | 3,960 | |||
5 | |||||
December | Sales revenue | 1,900 | |||
22 | |||||
December | Ending balance | 9,580 | |||
31 |
Table (15)
Income Tax Expense
Date | Particulars | Debit | Date | Particulars | Credit |
($) | ($) | ||||
December | Income tax payable | 215 | |||
31 | |||||
December | Ending balance | 215 | |||
31 |
Table (16)
Income Tax Payable Account
Date | Particulars | Debit | Date | Particulars | Credit |
($) | ($) | ||||
December | Opening balance | 215 | |||
1 | |||||
December | Ending balance | 215 | |||
31 |
Table (17)
(c)
To Prepare: The adjusted trial balance at December 31, 2017.
(c)
Explanation of Solution
Prepare the adjusted trial balance.
W Company | ||
Adjusted trial balance | ||
December 31, 2017 | ||
Particulars | Debit | Credit |
($) | ($) | |
Cash | 3,040 | |
Inventory | 2,336 | |
Accounts receivable | 9,580 | |
Equipment | 21,000 | |
Accumulated depreciation | 1,700 | |
on equipment | ||
Accounts payable | 5,880 | |
Salaries and wages payable | 400 | |
Income tax payable | 215 | |
Common stock | 10,000 | |
Retained earnings | 17,000 | |
Sales revenue | 5,860 | |
Sales returns and allowances | 180 | |
Salaries and wages expense | 400 | |
Income tax expenses | 215 | |
Cost of goods sold | 4,104 | |
Depreciation expense | 200 | |
Total | $41,055 | $41,055 |
Table (18)
(d)
The income statement: This is a financial statement that shows the net income earned, or net loss suffered by a company, through reporting all the revenues earned, and expenses incurred, by the company over a specific period of time. An income statement is also known as an operations statement, an earnings statement, a revenue statement, or a profit and loss statement. The net income is the excess of revenue over expenses.
Prepare the income statement of W Company.
Classified Balance Sheet: This is a financial statement where the assets, liabilities, and
To Prepare: The income statement for the month ended December 31, 2017 and a classified balance sheet at December 31, 2017.
(d)
Explanation of Solution
W Company | ||
Income statement | ||
For the month ended December 31, 2017 | ||
Particulars | Amount | Amount |
($) | ($) | |
Sales revenue | 5,860 | |
Less: Sales return and allowances | (180) | |
Net sales | 5,680 | |
Less: Cost of goods sold | (4,104) | |
Gross profit | 1,576 | |
Operating expenses: | ||
Salaries and wages expense | 400 | |
Depreciation expense | 200 | |
Income tax expense | 215 | (815) |
Net income | $761 |
Table (19)
Prepare a classified balance sheet of W Company as on December 31, 2017.
W Company | ||
Classified balance sheet | ||
December 31, 2017 | ||
Particulars | Amount | Amount |
($) | ($) | |
Assets: | ||
Current assets: | ||
Cash | 3,040 | |
Inventory | 2,336 | |
Accounts receivable | 9,580 | |
Total current assets | 14,956 | |
Property, plant, and equipment: | ||
Equipment | 21,000 | |
Less: Accumulated depreciation | (1,700) | 19,300 |
Total assets | $34,256 | |
Liabilities and stockholder’s equity: | ||
Current liabilities: | ||
Accounts payable | 5,880 | |
Salaries and wage payable | 400 | |
Income tax payable | 215 | |
Total current liabilities | 6,495 | |
Stockholder’s equity | ||
Common stock | 10,000 | |
Retained earnings | 17,761 (7) | 27,761 |
Total liabilities and stockholder’s equity | $34,256 |
Table (20)
Working Note:
Calculate the amount of retained earnings.
Therefore, the income statement indicates a net income of $761 for the month ending December 31, 2017.
Therefore, the balance sheet of W Company as on December 31, 2017 indicates equal amounts of assets and liabilities of $34,256.
(e)
To Compute: The ending inventory and cost of goods sold under FIFO method.
(e)
Explanation of Solution
Calculate the ending inventory and cost of goods sold under FIFO method.
Step 1: Calculate cost of goods available for sale.
FIFO Method | |||
Particulars | Units | Unit Cost ($) | Cost of Goods Available for Sales |
($) | |||
Beginning Inventory | 3,000 | 0.6 | 1,800 |
Add: Purchase on | 4,000 | 0.72 | 2,880 |
December 3 | |||
Add: Purchase on | 2,200 | 0.8 | 1,760 |
December 17 | |||
Total | 9,200 | $6,440 |
Table (21)
Step 2: Calculate ending inventory under FIFO method.
FIFO Method | |||
Date | Units | Rates | Amount |
($) | ($) | ||
Purchase on | 2,200 | 0.8 | 1,760 |
December 17 | |||
Add: Purchase on | 800 (8) | 0.72 | 576 |
December 3 | |||
Total ending inventory | 3,000 | $2,336 |
Table (22)
Working Note:
Calculate an amount of purchases on December 3.
Calculate cost of goods sold under FIFO method.
Particulars | Amount |
($) | |
Cost of goods available for sale | 6,440 |
Less: Ending inventory | (2,336) |
Cost of goods sold | $4,104 |
Table (23)
Therefore, the ending inventory under FIFO method for 3,000 units is $2,336.
Therefore, the cost of goods sold under FIFO method is $4,104.
(f)
To Compute: The ending inventory and cost of goods sold under LIFO method.
(f)
Explanation of Solution
Compute ending inventory under LIFO method.
Date | Units | Rates | Amount |
($) | ($) | ||
Purchase on | 3,000 | 0.72 | 2,160 |
December 1 | |||
Total ending inventory | 3,000 | $2,160 |
Table (24)
Compute cost of goods sold under LIFO method.
Particulars | Amount |
($) | |
Cost of goods available for sale | 6,440 |
Less: Ending inventory | (2,160) |
Cost of goods sold | $4,280 |
Table (25)
Therefore, the ending inventory under LIFO method for 3,000 units is $2,160.
Therefore, the cost of goods sold under LIFO method is $4,280
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Chapter 6 Solutions
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