Intermediate Accounting
Intermediate Accounting
9th Edition
ISBN: 9781259722660
Author: J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher: McGraw-Hill Education
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Chapter 8, Problem 8.1P

Various inventory transactions; journal entries

• LO8–1 through LO8–3

James Company began the month of October with inventory of $15,000. The following inventory transactions occurred during the month:

a. The company purchased merchandise on account for $22,000 on October 12, 2018. Terms of the purchase were 2/10, n/30. James uses the net method to record purchases. The merchandise was shipped f.o.b. shipping point and freight charges of $500 were paid in cash.

b. On October 31, James paid for the merchandise purchased on October 12.

c. During October merchandise costing $18,000 was sold on account for $28,000.

d. It was determined that inventory on hand at the end of October cost $19,060.

Required:

1. Assuming that the James Company uses a periodic inventory system, prepare journal entries for the above transactions including the adjusting entry at the end of October to record cost of goods sold.

2. Assuming that the James Company uses a perpetual inventory system, prepare journal entries for the above transactions.

1.

Expert Solution
Check Mark
To determine

Periodic Inventory System: It is a system in which the inventory is updated in the accounting records on a periodic basis such as at the end of each month, quarter or year. In other words, it is an accounting method which is used to determine the amount of inventory at the end of each accounting period.

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.

To Record: The journal entries using periodic inventory system.

Explanation of Solution

a. Record the entry for purchase on account.

Date Account Title and Explanation

Post

Ref.

Debit

($)

Credit

($)

October 12, 2018 Purchases   21,560 (1)  
  Accounts Payable     21,560
  (To record the purchase of inventories on account)      

Table (1)

Working Note:

Compute the purchase price of the inventory.

Purchase Price of Inventory=$22,0002%=$22,000$440=$21,560 (1)

  • Purchases account is an expense and it is decreased the equity value by $21,560. Therefore, debit purchase account with $21,560.
  • Accounts payable is a liability and it is increased by $21,560. Therefore, credit accounts payable account with $21,560.

Record the freight paid.

Date Account Title and Explanation

Post

Ref.

Debit

($)

Credit

($)

October 12, 2018 Freight-in   500  
  Cash     500
  (To record the freight cost)      

Table (2)

  • Freight-in account is an expense and it is decreased the equity value by $500. Therefore, debit freight-in account with $500.
  • Cash is an asset and it is decreased by $500. Therefore, credit cash account with $500.

b. Record the payment of accounts payable.

Date Account Title and Explanation

Post

Ref.

Debit

($)

Credit

($)

October 31, 2018 Accounts Payable   21,560 (1)  
  Interest Expense   440 (2)  
  Cash     22,000
  (To record the payment made to the supplier)      

Table (3)

Working Note:

Compute the interest expense.

Interest expense=$22,000×2%=$440 (2)

  • Accounts payable is a liability and it is decreased by $21,560. Therefore, debit accounts payable account with $21,560.
  • Interest expense account is an expense and it is decreased the equity value by $440. Therefore, debit interest expense account with $440.
  • Cash is an asset and it is decreased by $22,000. Therefore, credit cash account with $22,000.

c. Record the sales entry.

Date Account Title and Explanation

Post

Ref.

Debit

($)

Credit

($)

October 2018 Accounts Receivable   28,000  
  Sales Revenue     28,000
  (To record the sales on account)      

Table (4)

  • Accounts receivable is an asset and it is increased by $28,000. Therefore, debit accounts receivable account with $28,000.
  • Sales revenue is revenue and it increases the value of equity by $28,000. Therefore, credit sales revenue with $28,000.

Note:

There is no entry required for cost of goods sold under the periodic method.

d. Record the year-end adjusting entry.

Date Account Title and Explanation

Post

Ref.

Debit

($)

Credit

($)

October 31, 2018

Cost of Goods Sold

(Refer Table 6)

  18,000  
  Ending Inventory   19,060  
  Beginning Inventory     15,000
  Purchases     21,560
  Freight-in     500
  (To record the cost of goods sold)      

Table (5)

Working Note:

Calculate the cost of goods sold.

Particulars Amount ($) Amount ($)
Beginning Inventory   15,000
Add: Net Purchases    
         Purchases 21,560  
         Freight-in 500 22,060
Cost of goods available for sale   37,060
Less: Ending Inventory   (19,060)
Cost Of Goods Sold   18,000

Table (6)

  • Cost of Goods Sold and Ending Inventory generally shows a credit balance. Therefore, to close these accounts, it should be debited. Therefore, debit all the above mentioned accounts with their respective amounts.
  • Beginning Inventory, Purchases, and Freight-In generally shows a debit balance. Therefore, to close these accounts, it should be credited. Therefore, credit all the above mentioned accounts with their respective amounts.

2.

Expert Solution
Check Mark
To determine

To Record: The journal entries using perpetual inventory system.

Explanation of Solution

a. Record the entry for purchase on account.

Date Account Title and Explanation

Post

Ref.

Debit

($)

Credit

($)

October 12, 2018 Inventory   21,560  
  Accounts Payable     21,560
  (To record the purchase of inventories on account)      

Table (7)

  • Inventory is an asset and it is increased by $21,560. Therefore, debit inventory account with $21,560.
  • Accounts payable is a liability and it is increased by $21,560. Therefore, credit accounts payable account with $21,560.

Record the freight paid.

Date Account Title and Explanation

Post

Ref.

Debit

($)

Credit

($)

  Inventory   500  
  Cash     500
  (To record the freight cost)      

Table (8)

  • Inventory is an asset and it is increased by $500. Therefore, debit inventory account with $500.
  • Cash is an asset and it is decreased by $500. Therefore, credit cash account with $500.

b. Record the payment of accounts payable.

Date Account Title and Explanation

Post

Ref.

Debit

($)

Credit

($)

October 31, 2018 Accounts Payable   21,560 (1)  
  Interest Expense   440(2)  
  Cash     22,000
  (To record the payment made to the supplier)      

Table (9)

  • Accounts payable is a liability and it is decreased by $21,560. Therefore, debit accounts payable account with $21,560.
  • Interest expense account is an expense and it is decreased the equity value by $440. Therefore, debit interest expense account with $440.
  • Cash is an asset and it is decreased by $22,000. Therefore, credit cash account with $22,000.

c. Record the sales entry.

Date Account Title and Explanation

Post

Ref.

Debit

($)

Credit

($)

October 2018 Accounts Receivable   28,000  
  Sales Revenue     28,000
  (To record the sales on account)      

Table (10)

  • Accounts receivable is an asset and it is increased by $28,000. Therefore, debit accounts receivable account with $28,000.
  • Sales revenue is revenue and it increases the value of equity by $28,000. Therefore, credit sales revenue with $28,000.

The following is the journal entry.

Date Account Title and Explanation

Post

Ref.

Debit

($)

Credit

($)

October 2018 Cost of Goods Sold   18,000  
  Merchandised Inventory     18,000
  (To record the cost of goods sold)      

Table (11)

  • Cost of goods sold is an expense account and it decreases the value of equity by $18,000. Therefore, debit cost of goods sold account with $18,000.
  • Inventory is an asset and it is decreased by $18,000. Therefore, credit inventory account with $18,000.

d. Record the year-end adjusting entry.

Note:

No entry required for the year-end adjusting entry under perpetual inventory system.

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Chapter 8 Solutions

Intermediate Accounting

Ch. 8 - Prob. 8.11QCh. 8 - Describe the ratios used by financial analysts to...Ch. 8 - Prob. 8.13QCh. 8 - Prob. 8.14QCh. 8 - The Austin Company uses the dollar-value LIFO...Ch. 8 - Identify any differences between U.S. GAAP and...Ch. 8 - Determining ending inventory; periodic system ...Ch. 8 - Prob. 8.2BECh. 8 - Prob. 8.3BECh. 8 - Purchas e discounts; gross method LO83 On...Ch. 8 - Prob. 8.5BECh. 8 - Prob. 8.6BECh. 8 - Inventor y cost flow methods; perpetual system ...Ch. 8 - LIFO method LO84 Esquire Inc. uses the LIFO...Ch. 8 - LIFO method LO84 AAA Hardware uses the LIFO...Ch. 8 - LIFO liquidation LO86 Refer to the situation...Ch. 8 - Prob. 8.11BECh. 8 - Ratio analysis LO87 Selected financial statement...Ch. 8 - Dollar-value LIFO LO88 At the beginning of 2018,...Ch. 8 - Perpetual inventory system; journal entries LO81...Ch. 8 - Prob. 8.2ECh. 8 - Determining cost of goods sold; periodic inventory...Ch. 8 - Perpetual and periodic inventory systems compared ...Ch. 8 - Prob. 8.6ECh. 8 - Goods in transit; consignment LO82 The December...Ch. 8 - Physical quantities and costs included in...Ch. 8 - Prob. 8.9ECh. 8 - Prob. 8.10ECh. 8 - Prob. 8.11ECh. 8 - FASB codification research LO82, LO83 Access the...Ch. 8 - Inventory cost flow methods; periodic system ...Ch. 8 - Inventory cost flow methods; perpetual system ...Ch. 8 - Comparison of FIFO and LIFO; periodic system ...Ch. 8 - Average cost method; periodic and perpetual...Ch. 8 - FIFO, LIFO, and average cost methods LO81, LO84...Ch. 8 - Supplemental LIFO disclosures; LIFO reserve; AEP...Ch. 8 - LIFO liquidation LO81, LO84, LO86 The Reuschel...Ch. 8 - Dollar-value LIFO LO88 On January 1, 2018, the...Ch. 8 - Dollar-value LIFO LO88 Mercury Company has only...Ch. 8 - Dollar-value LIFO LO88 Carswell Electronics...Ch. 8 - Concepts; terminology LO81 through LO85 Listed...Ch. 8 - Various inventory transactions; journal entries ...Ch. 8 - Prob. 8.2PCh. 8 - Prob. 8.4PCh. 8 - Various inventory costing methods LO81, LO84...Ch. 8 - Various inventory costing methods LO81, LO84...Ch. 8 - Supple mental LIFO disclosures; Caterpillar LO84,...Ch. 8 - LIFO liquidation LO84, LO86 Taylor Corporation...Ch. 8 - LIFO liquidation LO84, LO86 Cansela Corporation...Ch. 8 - Prob. 8.11PCh. 8 - Integrating problem; inventories and accounts...Ch. 8 - Dollar-value LIFO LO88 On January 1, 2018, the...Ch. 8 - Dollar-value LIFO LO88 Kingston Company uses the...Ch. 8 - Dollar-value LIFO LO88 On January 1, 2018,...Ch. 8 - Prob. 8.1BYPCh. 8 - Real World Case 82 Physical quantities and costs...Ch. 8 - Judgment Case 83 The specific identification...Ch. 8 - Prob. 8.4BYPCh. 8 - Prob. 8.5BYPCh. 8 - Judgment Case 86 Goods in transit LO82 At the end...Ch. 8 - Ethics Case 87 Profit manipulation LO84 In 2017...Ch. 8 - Real World Case 88 Effects of inventory valuation...Ch. 8 - Real World Case 89 Effects of inventory valuation...Ch. 8 - Communication Case 810 Dollar-value LIFO method ...Ch. 8 - Prob. 8.11BYPCh. 8 - Prob. 8.CCTCCh. 8 - Prob. CCIFRS
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