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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