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Chapter 8: 3P (page 432)

Some of the transactions of Torres Company during August are listed below. Torres uses the periodic inventory method.

August 10 Purchased merchandise on account, \(12,000, terms 2/10, n/30.

13 Returned part of the purchase of August 10, \)1,200, and received

credit on account.

15 Purchased merchandise on account, \(16,000, terms 1/10, n/60.

25 Purchased merchandise on account, \)20,000, terms 2/10, n/30.

28 Paid invo

ice of August 15 in full.

Instructions

(a) Assuming that purchases are recorded at gross amounts and that discounts are to be recorded when taken:

(1) Prepare general journal entries to record the transactions.

(2) Describe how the various items would be shown in the financial statements.

(b) Assuming that purchases are recorded at net amounts and that discounts lost are treated as financial expenses:

(1) Prepare general journal entries to enter the transactions.

(2) Prepare the adjusting entry necessary on August 31 if financial statements are to be prepared at that time.

(3) Describe how the various items would be shown in the financial statements.

(c) Which of the two methods do you prefer and why?

Short Answer

Expert verified

Under the net method, the total purchase discount lost is $400.

Step by step solution

01

Inventory recording at gross method

1) Journal entries

Date

Description

Debit

Credit

Aug 10

Purchase A/c

$12,000

Accounts Payable

$12,000

Being goods purchased on account

Aug 13

Accounts Payable

$1,200

Purchase return and allowances

$1,200

Being goods return to vendor

Aug 15

Purchase A/c

$16,000

Accounts Payable

$16,000

Being goods purchased on account

Aug 25

Purchase A/c

$20,000

Accounts Payable

$20,000

Being goods purchased on account

Aug 28

Accounts Payable

$16,000

Cash

$16,000

Being payment made to the supplier

2) Treatment of various items

In the financial statements, mainly three accounts are reported 鈥� Purchase, Purchase return and allowances, and accounts payable.

In the income statement, net purchases are shown by subtracting the purchase return and allowances from the total gross purchase value.

In the balance sheet, the total accounts payable balance are shown on the liability side.

02

Inventory recording at net method

1) Journal entries

Date

Description

Debit

Credit

Aug 10

Purchase A/c

$11,760

Accounts Payable

$11,760

Being goods purchased on account

Aug 13

Accounts Payable

$1,176

Purchase discount lost

$24

Purchase return and allowances

$1,200

Being goods return to supplier and discount lost

Aug 15

Purchase A/c

$15,840

Accounts Payable

$15,840

Being goods purchased on account

Aug 25

Purchase A/c

$19,800

Accounts Payable

$19,800

Being goods purchased on account

Aug 28

Accounts Payable

$15,840

Purchase discount lost

$160

Cash

$16,000

Being payment made to supplier and discount lost

2) Adjusting entry

Date

Description

Debit

Credit

Aug 10

Profit & loss A/c

$,216

Purchase discount lost

$216

Being discount lost on Aug 10 purchase

3) Treatment of various items

In the financial statements, four accounts would be reported 鈥� Purchase, Purchase return and allowances, accounts payable, and purchase discount lost.

In the income statement, the total purchase value will show the net purchase amount and the net purchase value willbe after the deduction of purchase return and allowances. Purchase discount lost is reported as an expense.

In the balance sheet, the total accounts payable balance will be shown on the liability side.

03

Preferred method

The preferred method for recording purchases is the gross method. Some of the reasons for this preference are 鈥�

a) It is the simpler method

b) Net method is reluctant as discount lost has to be reported

c) It represents the correct purchase value at any time.

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Most popular questions from this chapter

FIFO, average-cost, and LIFO methods are often used instead of specific identification for inventory valuation purposes. Compare these methods with the specific identification method, discussing the theoretical propriety of each method in the determination of income and asset valuation.

Case 1: T J International

T J International was founded in 1969 as Trus Joist International. The firm, a manufacturer of specialty building products, has its headquarters in Boise, Idaho. The company, through its partnership in the Trus Joist MacMillan joint venture, develops and manufactures engineered lumber. This product is a high-quality substitute for structural lumber and uses lower-grade wood and materials formerly considered waste. The company also is majority owner of the Outlook Window Partnership, which is a consortium of three wood and vinyl window manufacturers.

Following is T J International鈥檚 adapted income statement and information concerning inventories from its annual report.

T J International

Sales \(618,876,000

Cost of goods sold 475,476,000

Gross profit 143,400,000

Selling and administrative expenses 102,112,000

Income from operations 41,288,000

Other expense 24,712,000

Income before income tax 16,576,000

Income taxes 7,728,000

Net income \) 8,848,000

Inventories.Inventories are valued at the lower of cost or market and include material, labor, and production overhead costs. Inventories consisted of the following:

Current Year Prior Year

Finished goods \(27,512,000 \)23,830,000

Raw materials and

work-in-progress 34,363,00033,244,000

61,875,000 57,074,000

Reduction to LIFO cost (5,263,000) (3,993,000)

\(56,612,000 \)53,081,000

The last-in, first-out (LIFO) method is used for determining the cost of lumber, veneer, Microllamlumber, TJI joists, and open web joists. Approximately 35 percent of total inventories at the end of the current year were valued using the LIFO method. The first-in, first-out (FIFO) method is used to determine the cost of all other inventories.

Instructions

(a) How much would income before taxes have been if FIFO costing had been used to value all inventories?

(b) If the income tax rate is 46.6%, what would income tax have been if FIFO costing had been used to value all inventories ? In your opinion, is this difference in net income between the two methods material? Explain.

(c) Does the use of a different costing system for different types of inventory mean that there is a different physical flow of goods among the different types of inventory? Explain.

Question:Included in the December 31 trial balance of Rivera Company are the following assets.

Cash \( 190,000 Work in process \)200,000

Equipment (net) 1,100,000 Accounts receivable (net) 400,000

Prepaid insurance 41,000 Patents 110,000

Raw materials 335,000 Finished goods 170,000

Prepare the current assets section of the December 31 balance sheet.A

Inventory information for Part 311 of Monique Aaron Corp. discloses the following information for the month of June.

June 1 Balance 300 units @ \(10 June 10 Sold 200 units @ \)24

11 Purchased 800 units @ \(12 15 Sold 500 units @ \)25

20 Purchased 500 units @ \(13 27 Sold 300 units @ \)27

Instructions

(a) Assuming that the periodic inventory method is used, compute the cost of goods sold and ending inventory under(1) LIFO and (2) FIFO.

(b) Assuming that the perpetual inventory method is used and costs are computed at the time of each withdrawal, what is the value of the ending inventory at LIFO?

(c) Assuming that the perpetual inventory method is used and costs are computed at the time of each withdrawal, what is the gross profit if the inventory is valued at FIFO?

(d) Why is it stated that LIFO usually produces a lower gross profit than FIFO?

The management of Tritt Company has asked its accounting department to describe the effect upon the company鈥檚 financial position and its income statements of accounting for inventorieson the LIFO rather than the FIFO basis during 2017 and 2018. The accounting department is to assume that the change to LIFO wouldhave been effective on January 1, 2017, and that the initial LIFO base would have been the inventory value on December 31, 2016. Thefollowing are the company鈥檚 financial statements and other data for the years 2017 and 2018 when the FIFO method was employed.

Financial Position as of

12/31/16 12/31/17 12/31/18

Cash \( 90,000 \)130,000 \(154,000

Accounts receivable 80,000 100,000 120,000

Inventory 120,000 140,000 176,000

Other assets 160,000 170,000 200,000

Total assets \)450,000 \(540,000 \)650,000

Accounts payable \( 40,000 \) 60,000 \( 80,000

Other liabilities 70,000 80,000 110,000

Common stock 200,000 200,000 200,000

Retained earnings 140,000 200,000 260,000

Total liabilities and equity \)450,000 \(540,000 \)650,000

Income for Years Ended

12/31/17 12/31/18

Sales revenue \(900,000 \)1,350,000

Less: Cost of goods sold 505,000 756,000

Other expenses 205,000 304,000

710,000 1,060,000

Income before income taxes 190,000 290,000

Income taxes (40%) 76,000 116,000

Net income \(114,000 \) 174,000

Other data:

1. Inventory on hand at December 31, 2016, consisted of 40,000 units valued at \(3.00 each.

2. Sales (all units sold at the same price in a given year):

2017鈥�150,000 units @ \)6.00 each 2018鈥�180,000 units @ \(7.50 each

3. Purchases (all units purchased at the same price in given year):

2017鈥�150,000 units @ \)3.50 each 2018鈥�180,000 units @ $4.40 each

4. Income taxes at the effective rate of 40% are paid on December 31 each year.

Instructions

Name the account(s) presented in the financial statements that would have different amounts for 2018 if LIFO rather than FIFOhad been used, and state the new amount for each account that is named. Show computations.
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