Concept explainers
Complete the accounting cycle using Inventory transactions (LO6-2.6-3. 6-5.6-6. 6-7)
On January 1, 2018, the general ledger of Big Blast Fireworks includes the following account balances:
Accounts | Debit | Credit |
Cash | $ 21,900 | |
Accounts Receivable | 36,500 | |
Allowance for Uncollectible Accounts Inventory | 30,000 | $ 3,100 |
Land Accounts Payable |
61,600 | 32,400 |
Notes Payable (8%. due in 3 years) | 30,000 | |
Common Stock | 56,000 | |
28,500 | ||
Totals | $150,000 | $150,000 |
The $30,000 beginning balance of inventory consists of 300 units, each costing $100. During January 2018, Big Blast Fireworks had the following inventory transactions:
January 3 Purchase 1,200 units for $126,000 on account ($105 each).
January 8 Purchase 1,300 units for $143,000 on account ($110 each).
January 12 Purchase 1,400 units for $161,000 on account ($115 each).
January 15 Return 100 of the units purchased on January 12 because of defects.
January 19 Sell 4,000 units on account for $600,000. The cost of the units sold is determined using a FIFO perpetual inventory system.
January 22 Receive $380,000 from customers on accounts receivable.
January 24 Pay $410,000 to inventory suppliers on accounts payable.
January 27 Write off accounts receivable as uncollectible, $2,500.
January 31 Pay cash for salaries during January, $128,000.
Required:
1. Record each of the transactions listed above, assuming a FIFO perpetual inventory system.
2. Record
a. At the end of January, the company estimates that the remaining units of inventory are expected to sell in February for only $100 each.
b. At the end of January, S4.000 of accounts receivable are past due, and the company estimates that 40% of these accounts will not be collected. Of the remaining accounts receivable, the company estimates that 4% will not be collected.
c. Accrued interest expense on notes payable for January. Interest is expected to be paid each December 31.
d. Accrued income taxes at the end of January are $12,300.
3. Prepare an adjusted
4. Prepare a multiple-step income statement for the period ended January 31, 2018.
5. Prepare a classified balance sheet as of January 31, 2018.
6. Record closing entries.
7. Analyze how well Big Blast Fireworks' manages its inventory:
a. Calculate the inventory turnover ratio for the month of January. If the industry average of the inventory turnover ratio for the month of January is 18.5 times. Is the company managing its inventory more or less efficiently than other companies in the same industry?
b. Calculate the gross profit ratio for the month of January. If the industry average gross profit ratio is 33%, is the company more or less profitable per dollar of sales than other companies in the same industry?
c. Used together, what might the inventory turnover ratio and gross profit ratio suggest about Big Blast Fireworks' business strategy? Is the company's strategy to sell a higher volume of less expensive items or does the company appear to be selling a lower volume of more expensive items?
(1)
To record: Each transactions of Company BBF, assuming a FIFO perpetual inventory system.
Explanation of Solution
Perpetual Inventory System:
Perpetual Inventory System refers to the inventory system that maintains the detailed records of every inventory transactions related to purchases, and sales on a continuous basis. It shows the exact on-hand-inventory at any point of time.
Record the journal entries of Company BFF, assuming a FIFO perpetual inventory system:
Date | Account Title and Explanation |
Post Ref. |
Debit ($) |
Credit ($) |
January 3 | Merchandised Inventory | 126,000 | ||
Accounts Payable | 126,000 | |||
(To record the purchase of inventories on account) | ||||
January 8 | Merchandised Inventory | 143,000 | ||
Accounts Payable | 143,000 | |||
(To record the purchase of inventories on account) | ||||
January 12 | Merchandised Inventory | 161,000 | ||
Accounts Payable | 161,000 | |||
(To record the purchase of inventories on account) | ||||
January 15 | Accounts Payable | 11,500 | ||
Merchandised Inventory (1) | 11,500 | |||
(To record the return of defective inventories) | ||||
January 19 | Accounts Receivable | 600,000 | ||
Sales Revenue | 600,000 | |||
(To record the sales on account) | ||||
January 19 | Cost of Goods Sold Table (2) | 437,000 | ||
Merchandised Inventory | 437,000 | |||
(To record the cost of goods sold) | ||||
January 22 | Cash | 580,000 | ||
Accounts receivable | 580,000 | |||
(To record the cash received on account) | ||||
January 24 | Accounts Payable | 410,000 | ||
Cash | 410,000 | |||
(To record the payment of inventory supplies on account) | ||||
January 27 | Allowance for uncollectible accounts | 2,500 | ||
Accounts receivable | 2,500 | |||
(To record the write off accounts receivable as uncollectible) | ||||
January 31 | Salaries expense | 128,000 | ||
Cash | 128,000 | |||
(To record the payment made to salaries) |
Table (1)
Working note:
Determine the amount of defective inventory:
Determine the amount of cost of goods sold:
Particulars | Number of units | Rate per unit ($) | Total cost ($) |
Beginning balance | 300 | 100 | 30,000 |
Purchase on January 3 | 1,200 | 105 | 126,000 |
Purchase on January 8 | 1,300 | 110 | 143,000 |
Purchase on January 12 | 1,200 | 115 | 138,000 |
Cost of goods sold | 437,000 |
Table (2)
(2)
To record: The adjusting entries on January 31.
Explanation of Solution
Adjusting entries:
Adjusting entries refers to the entries that are made at the end of an accounting period in accordance with revenue recognition principle, and expenses recognition principle. The purpose of adjusting entries is to adjust the revenue, and the expenses during the period in which they actually occurs.
Date | Account Title and Explanation |
Post Ref. |
Debit ($) |
Credit ($) |
(a) | Cost of Goods Sold | 1,500 | ||
January 31 | Merchandised Inventory (2) | 1,500 | ||
(To record the adjustment made in the cost of goods sold) | ||||
(b) | Bad debts expenses | 3,000 | ||
January 31 | Allowance for uncollectible accounts (3) | 3,000 | ||
(To record the adjustment in uncollectible accounts) | ||||
(c) | Interest expense (6) | 200 | ||
January 31 | Interest Payable | 200 | ||
To record the accrued interest expense) | ||||
(d) | Income tax Expense | 12,300 | ||
January 31 | Income tax Payable | 12,300 | ||
(To record the accrued income taxes) |
Table (3)
Working notes:
Determine the amount of merchandise inventory:
Determine the allowance for uncollectible accounts:
Determine the amount of uncollectible accounts:
Determine the amount of remaining receivables:
Determine the amount of interest expenses:
(3)
To prepare: An adjusted trail balance as of January 31, 2018.
Explanation of Solution
Adjusted trial balance:
Adjusted trial balance is a summary of all the ledger accounts, and it contains the balances of all the accounts after the adjustment entries are journalized, and posted.
An adjusted trail balance as of January 31, 2018 is prepared as follows:
Company BBF | ||
Adjusted Trial Balance | ||
January 31, 2018 | ||
Particulars | Debit ($) | Credit ($) |
Cash (7) | $63,900 | |
Accounts Receivable (8) | 54,000 | |
Inventory (9) | 10,000 | |
Land | 61,600 | |
Allowance for Uncollectible Accounts (11) | $3,600 | |
Accounts Payable (10) | 40,900 | |
Interest Payable | 200 | |
Income Tax Payable | 12,300 | |
Notes Payable | 30,000 | |
Common Stock | 56,000 | |
Retained Earnings | 28,500 | |
Sales Revenue | 600,000 | |
Cost of Goods Sold | 438,500 | |
Salaries Expense | 128,000 | |
Bad Debt Expense | 3,000 | |
Interest Expense | 200 | |
Income Tax Expense | 12,300 | |
Totals | $771,500 | $771,500 |
Table (4)
Working note:
Determine the amount of cash:
Determine the amount of accounts receivable:
Determine the amount of inventory:
Determine the amount of accounts Payable:
Determine the amount of uncollectible accounts:
The debit column and credit column of the unadjusted trial balance are agreed, both having balance of $771,500.
(4)
To prepare: A multiple-step income statement for the period ended January 31, 2018.
Explanation of Solution
A multiple-step income statement for the period ended January 31, 2018 is prepared as follows:
Income Statement (Multiple-Step) | ||
For the year ended January 31, 2018 | ||
Sales revenue | $600,000 | |
Cost of goods sold | 438,500 | |
Gross profit | $161,500 | |
Salaries expense | 128,000 | |
Bad debt expense | 3,000 | |
Total operating expenses | 131,000 | |
Operating income | 30,500 | |
Interest expense | 200 | |
Income before taxes | 30,300 | |
Income tax expense | 12,300 | |
Net income | $18,000 |
Table (5)
Therefore, a multiple-step income statement shows a net income of $18,000.
(5)
To prepare: A classified balance sheet as of January 31, 2018.
Explanation of Solution
Classified balance sheet:
This is the financial statement of a company which shows the grouping of similar assets and liabilities under subheadings.
A classified balance sheet as of January 31, 2018is prepared as follows:
Company BBF | ||||
Classified Balance Sheet | ||||
January 31, 2018 | ||||
Assets | Liabilities | |||
Cash | $63,900 | Accounts payable | $40,900 | |
Accounts receivable | 54,000 | Interest payable | 200 | |
Less: Allowance | -3,600 | 50,400 | Income tax payable | 12,300 |
Inventory | 10,000 | Total current liabilities | 53,400 | |
Total current assets | 124,300 | Notes payable | 30,000 | |
Total liabilities | 83,400 | |||
Land | 61,600 | Stockholders’ Equity | ||
Common stock | 56,000 | |||
Retained earnings | 46,500 | |||
Total stockholders’ equity | 102,500 | |||
Total assets | $185,900 | Total liabilities and stockholders’ equity | $185,900 |
Table (6)
(6)
To record: The closing entries.
Explanation of Solution
Closing entries:
Closing entries are recorded in order to close the temporary accounts such as incomes and expenses by transferring them to the permanent accounts. It is passed at the end of the accounting period, to transfer the final balance.
Closing entry for revenue and expense accounts:
Date | Accounts title and Explanation |
Debit ($) |
Credit ($) |
January 31, 2018 | Service Revenue | 600,000 | |
Retained earnings | 600,0000 | ||
(To close the revenues account) | |||
Retained earnings | 582,000 | ||
Cost of goods sold | 483,500 | ||
Salaries expenses | 128,000 | ||
Bad debt expense | 3,000 | ||
Interest expense | 200 | ||
Income tax expense | 12,300 | ||
(To close the expenses account) |
Table (7)
(7) (a)
To calculate: The inventory turnover ratio.
Answer to Problem 6.21E
The inventory turnover is 21.9 Times.
Explanation of Solution
Inventory turnover ratio: Inventory turnover ratio is used to determine the number of times inventory used or sold during the particular accounting period. The formula to calculate the inventory turnover ratio is as follows:
Working note:
The inventory turnover ratio is calculated as follows:
Calculate the average inventory:
The inventory turnover ratio is calculated by dividing cost of goods sold by average inventory during the period. The average inventory is calculating by dividing beginning inventory and ending inventory by 2. The inventory turnover ratio is an important measure as to how efficient is the management is good at managing inventory and achieving sales from it.
(7) (b)
To calculate: The gross profit ratio.
Answer to Problem 6.21E
The gross profit ratio is 26.9%.
Explanation of Solution
Gross profit method
This method is use the estimated gross profit for the period to evaluate and ascertain the ending inventory for the period. The gross profit for the period is calculated from the preceding year, which is adjusted for any current period changes in the sales and cost price of the inventory.
Working note:
The gross profit ratio is calculated as follows:
(7) (c)
To state: Whether the company sells a higher volume of less expensive item or a lower volume of more expensive items.
Explanation of Solution
From the inventory turnover ratio and the gross profit ratio, it is clear that the Company BB appears to sell a higher volume of less expensive. This is because, the lower price item sell more than high priced items.
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Chapter 6 Solutions
Financial Accounting
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