Chapter 4, Problem 26EP

 The following events and transactions relate to the purchase and use of supplies inventory for Jedville Township:

1. 1. On March 21, 2019, supplies were ordered at an estimated cost of $847,000.
2. 2. Supplies were received on April 4, 2019, and the actual cost of $850,000 was paid in cash.
3. 3. On December 31, 2019, $70,000 in supplies remain. (Assume there was no beginning balance.)
4. 4. On February 23, 2020, supplies were ordered at an estimated cost of $855,000.
5. 5. Supplies were received on March 6, 2020, and the actual cost of $860,000 was paid in cash.
6. 6. On December 31, 2020, $60,000 in supplies remain.

   Required

7. 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.)
8. 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.)
9. 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.)
10. d.      Compare the expenditure and expense account totals each year under the three methods.
11. e.       How will inventory balances be presented on the financial statements at the end of each year?

To determine

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)

To determine

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)

To determine

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)

To determine

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.

To determine

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.