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Chapter 6: Problem 29

Pulmonary Inc.'s perpetual inventory records indicate that \(\$ 382,800\) of merchandise should be on hand on March 31,2006 . The physical inventory indicates that \(\$ 371,250\) of merchandise is actually on hand. Journalize the adjusting entry for the inventory shrinkage for Pulmonary Inc. for the year ended March 31, \(2006 .\)

Short Answer

Expert verified
The adjusting entry is: Debit Inventory Shrinkage \( \$11,550 \) and Credit Merchandise Inventory \( \$11,550 \).

Step by step solution

01

Determine Inventory Shrinkage

Subtract the physical inventory from the perpetual inventory records to calculate the inventory shrinkage. Perpetual Inventory: \( \\(382,800 \) Physical Inventory: \( \\)371,250 \)Inventory Shrinkage = Perpetual Inventory - Physical Inventory = \( \\(382,800 - \\)371,250 = \$11,550 \)
02

Prepare the Journal Entry

To record the inventory shrinkage, you will create a journal entry. This involves debiting the "Inventory Shrinkage" account to record the loss and crediting the "Merchandise Inventory" account to reduce the recorded amount in the books. - Debit: Inventory Shrinkage \( \\(11,550 \) - Credit: Merchandise Inventory \( \\)11,550 \)
03

Write the Journal Entry

The final journal entry will look like this:- Debit: Inventory Shrinkage \( \\(11,550 \) - Credit: Merchandise Inventory \( \\)11,550 \)This entry adjusts the Merchandise Inventory account to reflect the physical count and accounts for the shrinkage cost detected.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Journal Entry
A journal entry is a fundamental practice in accounting that records financial transactions in a company's accounts systematically. In this exercise, the purpose of the journal entry is to adjust the books for the actual inventory after a physical count has revealed a discrepancy. When inventory shrinkage occurs, it's important to update accounting records to maintain accuracy. This generally involves two main actions:
  • Debit an expense or loss account (in this case, "Inventory Shrinkage") to reflect the loss of inventory.
  • Credit the "Merchandise Inventory" account, which reduces the amount of recorded inventory to match the physical count.
This adjustment ensures the balance sheet and income statement accurately reflect the company's financial status. By properly accounting for shrinkage, future financial reports will be reliable and consistent.
Perpetual Inventory System
The perpetual inventory system is a method of maintaining up-to-date inventory records by continuously tracking inventory levels. This system records each transaction involving inventory immediately as it happens. The key advantage of this system is that it provides real-time data. Such immediate updates help businesses make informed decisions regarding purchasing and inventory management.
Key characteristics include:
  • Automatic updates in the inventory account after each sale or purchase.
  • Real-time accuracy which aids in effective inventory control.
  • Helps in identifying differences resulting from inventory shrinkage promptly.
In the context of the exercise, the perpetual inventory record initially showed an inventory amount of \(\$382,800\), which was later compared with the physical count.
Physical Inventory Count
A physical inventory count is the process of counting all the inventory a business has on hand at a specific point in time. This count determines the actual physical quantity and value of inventory compared to what the perpetual inventory system records show. Conducting regular physical inventory counts allows businesses to detect discrepancies due to shrinkage, theft, or clerical errors.
Benefits of physical inventory count include:
  • Ensuring the accuracy of financial records by verifying stock in hand.
  • Helping in identifying inventory shrinkage and thereby aiding in loss prevention.
  • Providing insights into inventory turn and how well stock levels match sales.
In Pulmonary Inc.'s scenario, while the perpetual inventory suggested that there should be $382,800 worth of merchandise, the actual physical count showed only $371,250. This difference highlights the importance of regular physical checks.

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Most popular questions from this chapter

What is the normal balance of the following accounts: (a) Cost of Merchandise Sold, (b) Merchandise Inventory, (c) Sales, (d) Sales Discounts, (e) Sales Returns and Allowances, (f) Transportation Out?

During the current year, merchandise is sold for \(\$ 250,000\) cash and for \(\$ 975,000\) on account. The cost of the merchandise sold is \(\$ 735,000\). a. What is the amount of the gross profit? b. Compute the gross profit percentage (gross profit divided by sales). c. Win Will the income statement necessarily report a net income? Explain.

On January 31,2006 , the balances of the accounts appearing in the ledger of Calloway Company, a furniture wholesaler, are as follows: \(\begin{array}{lrlr}\text { Administrative Expenses } & \$ 80,000 & \text { Notes Payable } & \$ 25,000 \\ \text { Building } & 512,500 & \text { Office Supplies } & 10,600 \\ \text { Cash } & 48,500 & \text { Salaries Payable } & 3,220 \\ \text { Cost of Merchandise Sold } & 560,000 & \text { Sales } & 925,000 \\ \text { Interest Expense } & 7,500 & \text { Sales Discounts } & 20,000 \\ \text { Mark Donovan, Capital } & 628,580 & \text { Sales Returns and Allowances } & 60,000 \\ \text { Mark Donovan, Drawing } & 25,000 & \text { Selling Expenses } & 120,000 \\ \text { Merchandise Inventory } & 130,000 & \text { Store Supplies } & 7,700\end{array}\) a. Prepare a multiple-step income statement for the year ended January \(31,2006 .\) b. Compare the major advantages and disadvantages of the multiple-step and singlestep forms of income statements.

Journalize the entries for the following transactions: a. Sold merchandise for cash, \(\$ 6,900\). The cost of the merchandise sold was \(\$ 4,830\). b. Sold merchandise on account, \(\$ 7,500\). The cost of the merchandise sold was \(\$ 5,625 .\) c. Sold merchandise to customers who used MasterCard and VISA, \(\$ 10,200\). The cost of the merchandise sold was \(\$ 6,630\). d. Sold merchandise to customers who used American Express, \(\$ 7,200\). The cost of the merchandise sold was \(\$ 5,040\). e. Paid an invoice from City National Bank for \(\$ 675\), representing a service fee for processing MasterCard and VISA sales. f. Received \(\$ 6,875\) from American Express Company after a \(\$ 325\) collection fee had been deducted.

Merchandise is sold on account to a customer for \(\$ 18,000\), terms FOB shipping point, \(3 / 10, \mathrm{n} / 30\). The seller paid the transportation costs of \(\$ 375\). Determine the following: (a) amount of the sale, (b) amount debited to Accounts Receivable, (c) amount of the discount for early payment, and (d) amount due within the discount period.
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