Chapter 6, Problem 6.6BP

Record transactions using a perpetual system, prepare a partial income statement, and adjust for the lower of cost and net realizable value (LO6–2, 6–3, 6–4, 6–5, 6–6)

At the beginning of November, Yoshi Inc.’s inventory consists of 60 units with a cost per unit of $94. The following transactions occur during the month of November.

    November 2    Purchase 90 units of inventory on account from Toad Inc. for $100 per unit, terms 3/10, n/30.

    November 3    Pay cash for freight charges related to the November 2 purchase, $231.

    November 9    Return 13 defective units from the November 2 purchase and receive credit. November 11    Pay Toad Inc. in full.

    November 16    Sell 100 units of inventory to customers on account, $14,000. (Hint: The cost of units sold from the November 2 purchase includes $100 unit cost plus $3 per unit for freight less $3 per unit for the purchase discount, or $100 per unit.)

    November 20    Receive full payment from customers related to the sale on November 16.

    November 21    Purchase 70 units of inventory from Toad Inc. for $104 per unit, terms 2/10, n/30.

    November 24    Sell 90 units of inventory to customers for cash, $12,600.

Required:

  1.    Assuming that Yoshi Inc. uses a FIFO perpetual inventory system to maintain its internal inventory records, record the transactions.

  2.    Suppose by the end of November that the remaining inventory is estimated to have a net realizable value per unit of $81, record any necessary adjustment for the lower of cost and net realizable value.

  3.    Prepare the top section of the multiple-step income statement through gross profit for the month of November after the adjustment for lower of cost and net realizable value.

To determine

To Record: The transactions of Incorporation Y, assuming that it uses a FIFO perpetual inventory system to maintain its inventory records.

Explanation of Solution

Perpetual Inventory System:

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.

First-in First-Out method (FIFO): Under FIFO method the cost of first acquired items is assigned to sales first. The value of the closing stock includes the cost of recently acquired item.

November 2: Purchased 90 units at the rate of $100 each on account:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
November 2	Inventory		9,000
	Accounts Payable			9,000
	(To record the purchase of inventories on account)

Table (1)

• Inventory is an asset and increased by $9,000. Therefore, debit the inventory account with $9,000.
• Accounts payable is a liability and increased by $9,000. Therefore, credit the accounts payable account with $9,000.

November 3: Paid a freight charge of $231:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
November 3	Inventory		231
	Cash			231
	(To record the payment of freight charge)

Table (2)

• Inventory is an asset and increased by $231. Therefore, debit the merchandised inventory account with $231.
• Cash is an asset and decreased by $231. Therefore, credit the cash account with $231.

November 9: Inventories 13 units returned to suppliers:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
November 9	Accounts Payable		1,300
	Inventory			1,300
	(To record the purchase return to the supplier)

Table (3)

Working Note:

$\begin{array}{c}\text{Value of inventory returned=Number of units returned}\times \text{Rate per unit}\\ \text{=13 units}\times \text{\$100}\\ \text{=\$1,300}\end{array}$

• Accounts Payable is liability and decreased by $1,300. Therefore, debit the accounts payable account with $1,300.
• Inventory is an asset and decreased by $1,300. Therefore, credit the merchandised inventory account with $1,300.

November 11: Company T paid full amount due:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
November 11	Accounts Payable		7,700
	Inventory			231
	Cash			7,469
	(To record the payment made to the supplier)

Table (4)

Working Note:

Compute the amount of purchase discount:

$\begin{array}{c}\text{Dicount Amount }=\left[\begin{array}{c}\left(\text{Invoice Price}-\text{Purchase Return}\right)\\ \times \text{ Rate of Discount}\end{array}\right]\\ =\left(\text{\$9,000}-\$1,300\right)\times \text{2\%}\\ =\text{\$231}\end{array}$ (3)

Compute the amount due to the supplier:

Compute the accounts payable:

Invoice price = $9,000 (1)

Purchase return = $1,300 (2)

$\begin{array}{c}\text{Accounts payable}=\left(\begin{array}{l}\text{Invoice price }-\\ \text{Purchase return}\end{array}\right)\\ =\$9,000-\$1,300\\ =\$7,700\end{array}$ (4)

Compute the total amount due to the suppliers:

Accounts receivables = $7,700(4)

Purchase discount = $231 (3)

$\begin{array}{c}\text{Amount due to the suppliers}=\left(\begin{array}{l}\text{Accounts Receviables }\\ -\text{Purchase discount}\end{array}\right)\\ =\$7,700-\$231\\ =\$7,469\end{array}$ (5)

• Accounts Payable is a liability and decreased by $7,700. Therefore, debit the accounts payable account with $7,700.
• Merchandised inventory is an asset and decreased by $231. Therefore, credit the merchandised inventory account with $231.
• Cash is an asset and decreased by $7,469. Therefore, credit cash account with $7,469.

November 16: Sold 100 units on account:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
November 16	Accounts Receivable		14,000
	Sales Revenue			14,000
	(To record the sale of inventory)

Table (5)

• Accounts Receivable is an asset account and increased by $14,000. Therefore, debit the accounts Receivable account with $14,000.
• Sales revenue is an equity account and increased by $14,000. Therefore, credit the sales revenue account with $14,000.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
November 16	Cost of Goods Sold		9,640
	Inventory			9,640
	(To record the cost of goods sold)

Table (6)

Working Note:

Cost of goods sold:

$\begin{array}{c}\text{Cost of goods sold=}\left[\begin{array}{l}\left(\text{Total number of units before November 2}\times \text{Cost per unit}\right)\\ +\left(\text{Total number of units after November 2}\times \text{Cost per unit}\right)\end{array}\right]\\ =\left[\left(60\text{units}\times \text{\$94}\right)+\left(\text{100}\text{units}\times \text{\$40}\right)\right]\\ =\$9,640\end{array}$

• Cost of goods sold is an expense and has increased, which has decreased the equity by $8,440. Therefore, debit cost of goods sold account with $9,640.
• Inventory is an asset and decreased by $8,440. Therefore, credit the inventory account with $9,640.

November 20: Received full payment from customers on account:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
November 19	Cash		14,000
	Accounts receivable			14,000
	(To record the full payment received from the customers on account)

Table (7)

• Cash is an asset account and it is increased by $14,000. Therefore, debit the cash account with $14,000.
• Accounts receivable is an asset account and it is decreased by $14,000. Therefore, credit the accounts receivable account with $14,000.

November 21: Purchased 70 units at the rate of $104 each on account:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
November 21	Inventory		7,280
	Accounts Payable			7,280
	(To record the purchase of inventories on account)

Table (8)

• Inventory is an asset and increased by $7,280. Therefore, debit the inventory account with $7,280.
• Accounts payable is a liability and increased by $7,280. Therefore, credit the accounts payable account with $7,280.

November 24: Sold 90 units:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
November 24	Cash		12,600
	Sales Revenue			12,600
	(To record the sale of inventory)

Table (9)

• Cash is an asset account and increased by $12,600. Therefore, debit the cash account with $12,600.
• Sales revenue is an equity account and increased by $12,600. Therefore, credit the sales revenue account with $12,600.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
November 24	Cost of Goods Sold		9,212
	Inventory			9,212
	(To record the cost of goods sold)

Table (10)

Working Note:

Cost of goods sold:

$\begin{array}{c}\text{Cost of goods sold=}\left[\begin{array}{l}\left(\begin{array}{l}\text{Total number of units remaining}\\ \text{after November 16 sale}\times \text{Cost per unit}\end{array}\right)+\\ \left(\begin{array}{l}\text{Total number of units on}\\ \text{November 20 purchase}\times \text{Cost per unit}\end{array}\right)\end{array}\right]\\ =\left[\left(37\text{units}\times \text{\$100}\right)+\left(53\text{units}\times \text{\$104}\right)\right]\\ =\$9,212\end{array}$

• Cost of goods sold is an expense and has increased, which has decreased the equity by $9,212. Therefore, debit cost of goods sold account with $9,212.
• Inventory is an asset and decreased by $9,212. Therefore, credit the inventory account with $9,212.

To determine

To Record: Any necessary adjustment for lower of cost and net realizable value.

Explanation of Solution

Record the necessary adjustment for lower of cost and net realizable value.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
November 30	Cost of Goods Sold		391
	Inventory			391
	(To record the adjustment for lower of cost and net realizable value)

Table (11)

• Cost of goods sold is an expense and increased which has decreased the equity by $391. Therefore, debit cost of goods sold account with $391.
• Merchandised inventory is an asset and decreased by $391. Therefore, credit the merchandised inventory account with $391.

Working note:

Calculation of Cost of Ending Inventory
Details	Number of Units	Rate per Unit ($)	Total Cost ($)
November 21	17	104	1,768
Ending Inventory	17		1,768

Table (12)

The ending inventory is adjusted at the cost of the inventory or net realizable value whichever is less. The cost of the FIFO ending inventory is $\left(\text{17Units×\$104}\right)$ $1,768 whereas the net realizable value of ending inventory $\left(\text{17Units×\$81}\right)$ is $1,377. Hence, the net realizable value of $391 which is the lesser amount is the amount to which the ending inventory is to be adjusted to.

To determine

To Prepare: The top section of the multiple-step income statement through gross profit for the month of November after the adjustment for lower of cost and net realizable value.

Explanation of Solution

Prepare the top section of the multiple-step income statement through gross profit for the month of November after the adjustment for lower of cost and net realizable value.

Incorporation Y
Multi-step Income Statement (Partial)
For the month of November
Particulars	$
Net sales	26,600
Less: Cost of goods sold	19,243
Gross Profit	7,357

Table (12)

$\begin{array}{c}\text{Cost of goods sold=}\left(\text{Cost of units sold+Write down to net realizable value}\right)\\ =\left(\$9,640+\$9,212\right)+\$391\\ =\left(\$18,852\right)+\$391\\ =\$19,243\end{array}$