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Chapter 8: E8-9 (page 425)

Question: Fong Sai-Yuk Company sells one product. Presented below is information for January for Fong Sai-Yuk Company.

Jan. 1 Inventory 100 units at \(5 each

4 Sale 80 units at \)8 each

11 Purchase 150 units at \(6 each

13 Sale 120 units at \)8.75 each

20 Purchase 160 units at \(7 each

27 Sale 100 units at \)9 each

Fong Sai-Yuk uses the FIFO cost flow assumption. All purchases and sales are on account.

Instructions

(a) Assume Fong Sai-Yuk uses a periodic system. Prepare all necessary journal entries, including the end-of-month closing entry to record cost of goods sold. A physical count indicates that the ending inventory for January is 110 units.

(b) Compute gross profit using the periodic system.

(c) Assume Fong Sai-Yuk uses a perpetual system. Prepare all necessary journal entries.

(d) Compute gross profit using the perpetual system.

Short Answer

Expert verified

As the FIFO method is being used, gross profit under the periodic and perpetual systems are the same, i.e., $840.

Step by step solution

01

Journal entries under a periodic system

Date

Description

Debit

Credit

Jan 4

Accounts Receivables

$640

Sales Revenue

$640

(Being goods sold)

Jan 11

Purchase A/c

$900

Accounts Payable

$900

(Being goods purchased on credit)

Jan 13

Accounts Receivables

$1050

Sales Revenue

$1050

(Being goods sold on credit)

Jan 20

Purchase A/c

$1120

Accounts Payable

$1120

(Being goods purchased on credit)

Jan 27

Accounts Receivables

$900

Sales Revenue

$900

(Being goods sold on credit)

Jan 31

Inventory A/c (ending)

$770

Cost of goods sold

$1750

Purchase A/c

$2020

Inventory A/c (beginning)

$500

02

Gross profit under the periodic system

GrossProfit=TotalSales-Costofgoodssold=$2,590-$1,750=$840

03

Journal entries under a perpetual system

Date

Description

Debit

Credit

Jan 4

Accounts Receivables

$640

Sales Revenue

$640

(Being goods sold)

Jan 4

Cost of goods sold

$400

Inventory

$400

(Being cost of goods sold recorded)

Jan 11

Purchase A/c

$900

Accounts Payable

$900

(Being goods purchased on credit)

Jan 13

Accounts Receivables

$1050

Sales Revenue

$1050

(Being goods sold on credit)

Jan 13

Cost of goods sold

$700

Inventory A/c

$700

(Being cost of goods sold recorded)

Jan 20

Purchase A/c

$1120

Accounts Payable

$1120

(Being goods purchased on credit)

Jan 27

Accounts Receivables

$900

Sales Revenue

$900

(Being goods sold on credit)

Jan 27

Cost of goods sold

$650

Inventory A/c

$650

(Being cost of goods sold recorded)

04

Gross Profit under the perpetual system

Gross Profit is $840

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Most popular questions from this chapter

You are asked to travel to Milwaukee to observe and verify the inventory of the Milwaukee branch of one of your clients. You arrive on Thursday, December 30, and find that the inventory procedures have justbeen started. You spot a railway car on the sidetrack at the unloading door and ask the warehouse superintendent, Buck Rogers,how he plans to inventory the contents of the car. He responds, 鈥淲e are not going to include the contents in the inventory.鈥�

Later in the day, you ask the bookkeeper for the invoice on the carload and the related freight bill. The invoice lists the variousitems, prices, and extensions of the goods in the car. You note that the carload was shipped December 24 from Albuquerque,f.o.b. Albuquerque, and that the total invoice price of the goods in the car was \(35,300. The freight bill called for a payment of\)1,500. Terms were net 30 days. The bookkeeper affirms the fact that this invoice is to be held for recording in January.

Instructions

(a) Does your client have a liability that should be recorded at December 31? Discuss.

(b) Prepare a journal entry(ies), if required, to reflect any accounting adjustment required. Assume a perpetual inventory

system is used by your client.

(c) For what possible reason(s) might your client wish to postpone recording the transaction?

What is the dollar-value method of LIFO inventory valuation? What advantage does the dollar-value method have over the specific goods approach of LIFO inventory valuation? Why will the traditional LIFO inventory costing method and the dollar-value LIFO inventory costing method produce different inventory valuations if the composition of the inventory base changes?

Norman鈥檚 Televisions produces television sets in three categories: portable, midsize, and flat-screen. On January 1, 2017, Norman adopted dollar-value LIFO and decided to use a single inventory pool. The company鈥檚January 1 inventory consists of:

Category Quantity Cost per Unit Total Cost

Portable 6,000 \(100 \) 600,000

Midsize 8,000 250 2,000,000

Flat-screen 3,000 400 1,200,000

17,000 \(3,800,000

During 2017, the company had the following purchases and sales.

QuantitySelling Price

Category Purchased Cost per Unit Sold per Unit

Portable 15,000 \)110 14,000 $150

Midsize 20,000 300 24,000 405

Flat-screen 10,000 500 6,000 600

45,000 44,000

Instructions

(Round to four decimals.)

(a) Compute ending inventory, cost of goods sold, and gross profit.

(b) Assume the company uses three inventory pools instead of one. Repeat instruction (a).

As compared with the FIFO method of costing inventories, does the LIFO method result in a larger or smaller net income in a period of rising prices? What is the comparative effect on net income in a period of falling prices?

The board of directors of Ichiro Corporation is considering whether or not it should instruct the accounting department to shift from a first-in, first out (FIFO) basis of pricing inventories to a last-in, first-out (LIFO) basis. The following information is available.

Sales 21,000 units @ \(50

Inventory, January 1 6,000 units @ 20

Purchases 6,000 units @ 22

10,000 units @ 25

7,000 units @ 30

Inventory, December 31 8,000 units @ ?

Operating expenses \)200,000

Instructions

Prepare a condensed income statement for the year on both bases for comparative purposes.
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