CASE #1: Sophia Wise Computer Sales is a merchandiser and purchases its products directly from manufacturers. In turn, it sells those products to its various customers. One of its customers is Hillary Zabkar Electronics. The following transactions took place between Sophia Wise (seller) and its customer, Hillary Zabkar Electronics during the month of December:

Dec 1

Sold merchandise to Hillary Zabkar on credit for $5,000, terms 3/10, n/30. The items sold had a cost of $3,500

Dec 3

Purchased merchandise from a manufacturer for cash, $720.

Dec 4

Purchased merchandise from a manufacturer on credit for $2,600, terms 1/20, n/30.

Dec 5

Issued a credit memorandum for $300 to its customer Hillary Zabkar Electronics who returned merchandise purchased Nov 29th. The returned items had a cost of $210

Dec 11

Received payment for merchandise sold Dec 1

Dec 15

Received a credit memorandum from a manufacturer for the return of faulty merchandise purchased on Dec 4 for $600.

Dec 18

Paid freight charges of $200 for merchandise ordered last month (FOB shipping point)

Dec 23

Paid for the merchandise purchased Dec 4 less the portion that was returned

Dec 24

Sold merchandise to Hillary Zabkar on credit for $7,000, terms 2/10, n/30. The items had a cost of $4,900

Dec 31

Received payment for merchandise sold on Dec 24

Problem #1

Assuming a perpetual inventory system, prepare the required journal entries that Sophia Wise Computer Sales must make to record these transactions:

Problem #2

Assuming a periodic inventory system, prepare the required journal entries that Sophia Wise Computer Sales must make to record these transactions:

Problem #3

Assuming a perpetual inventory system, prepare the required journal entries that Hillary Zabkar Electronics must make to record these transactions:

Problem #4

Assuming a periodic inventory system, prepare the required journal entries that Hillary Zabkar Electronics must make to record these transactions:

CASE #2::

Sarah Perreault Corp. sold 6,400 units of its product at $45 per unit in year 2013 and incurred operating expenses of $6 per unit in selling them. It began the year with 600 units in inventory and the following transactions took place during the fiscal year:

DATE

ACTIVITY

UNITS

PRICE

Jan 1

Beginning inventory

600

$18 per unit

Feb 20

Purchase

1,500

$19 per unit

May 16

Purchase

700

$20 per unit

Oct 3

Purchase

400

$21 per unit

Dec 11

Purchase

3,300

$22 per unit

Feb 22

Sale

750

$45 per unit

May 15

Sale

890

$45 per unit

Sep 11

Sale

775

$45 per unit

Dec 28

Sale

3,985

$45 per unit

Problem #1

Prepare comparative income statements similar to the ones found in your text at Exhibit 6.8 for the three inventory cost flow methods of FIFO, LIFO and weighted average. The company uses a perpetual inventory system and its income tax rate is 30%.

In calculating cost of sales, be sure to demonstrate the flow of inventory during the year and prove your ending inventory amount by using the inventory cost formula (BI + Purchases = GA EI = CGS).

Problem #2

Discuss in 500 words or less how the financial results from using the three alternative methods would change if Sarah Perreault had been experiencing declining costs in its purchases of inventory?

Problem #3

What advantages and disadvantages are offered by using LIFO and FIFO? Assume the continuing trend of increasing costs.

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