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Chapter 9: Q. 9-5E (page 476)

Presented below is information related to Knight Enterprises. Jan. 31 Feb. 28 Mar. 31 Apr. 30 Inventory at cost \(15,000 \)15,100 \(17,000 \)14,000 Inventory at LCNRV 14,500 12,600 15,600 13,300 Purchases for the month 17,000 24,000 26,500 Sales for the month 29,000 35,000 40,000 Instructions (a) From the information, prepare (as far as the data permit) monthly income statements in columnar form for February, March, and April. The inventory is to be shown in the statement at cost; the gain or loss due to market fluctuations is to be shown separately (using a valuation account). (b) Prepare the journal entry required to establish the valuation account at January 31 and entries to adjust it monthly thereafter. E9-6 (L01) (LCNR

Short Answer

Expert verified
  1. Per the income statement, net income for February, March, and April equals $10,100, $14,000 and $11,200, respectively.
  2. Journal entries are mentioned in Step 4.

Step by step solution

01

Monthly income statement

(a) Monthly income statement is shown as follows:

Income Statement

February

March

April

Sales

$29,000

$35,000

$40,000

Cost of goods sold

16,900

22,100

29,500

Gross profit

12,100

12,900

10,500

Gain or loss due to market fluctuations of inventory

(2,000)

1,100

700

Net Income

$10,100

$14,000

$11,200

02

Statement of cost

Statement of cost is shown as follows:

Feb. 28.

Mar. 31

Apr. 30

Beginning inventory

$15,000

$15,100

$17,000

Add: Purchases for month

17,000

24,000

26,500

Cost of goods available

32,000

39,100

43,500

Less: Ending inventory

15,100

17,000

14,000

Cost of goods sold

$16,900

$22,100

$29,500

03

Statement of gain or loss due to market fluctuations

Statement of gain or loss due to market fluctuations is shown as follows:

Date

Inventory at Cost

Inventory at LNRV

Amount Required in Valuation Account

Gain (loss) due to market fluctuations of inventory

Jan. 31

$15,000

$14,500

$500

Feb. 28

15,100

12,600

2,500

$(2,000)

Mar. 31

17,000

15,600

1,400

1,100

Apr. 30

14,000

13,300

700

700

04

Journal entries

  1. Journal entries are as follows:

Date

Accounts

Debit

Credit

Jan. 31

Loss due to market decline of inventory

$500

Allowance to reduce inventory to market

$500

Feb. 28

Loss due to market decline of inventory

2,000

Allowance to reduce inventory to market

2,000

Mar. 31

Allowance to reduce inventory to market

1,100

Recovery of loss due to market decline of inventory

1,100

Apr. 30

Allowance to reduce inventory to market

$700

Recovery of loss due to market decline of inventory

$700

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