A Comprehensive Problem
CPI sells computer peripherals. At December 31, year 1, CPI’s inventory amounted to $500,000. During the first week in January, year 2, the company made only one purchase and one sale. These transactions were as follows.
|Jan. 2||Purchased 20 modems and 80 printers from Sharp. The total cost of these machines was $25,000, terms 3/10, n/60.|
|Jan. 6||Sold 30 different types of products on account to Pace Corporation. The total sales price was $10,000, terms 5/10, n/90. The total cost of these 30 units to CPI was $6,100 (net of the purchase discount).|
CPI has a full-time accountant and a computer-based accounting system. It records sales at the gross sales price and purchases at net cost and maintains subsidiary ledgers for accounts receivable, inventory, and accounts payable.
- Briefly describe the operating cycle of a merchandising company. Identify the assets and liabilities directly affected by this cycle.
- Prepare journal entries to record these transactions, assuming that CPI uses a perpetual inventory system.
- Compute the balance in the Inventory account at the close of business on January 6.
- Prepare journal entries to record the two transactions, assuming that CPI uses a periodic inventory system.
- Compute the cost of goods sold for the first week of January assuming use of the periodic system. (Use your answer to part cas the ending inventory.)
- Which type of inventory system do you think CPI most likely would use? Explain your reasoning.
- Compute the gross profit margin on the January 6 sales transaction.
Four Methods of Inventory Valuation
On January 15, 2018, Sports World sold 1,000 Ace-5 fishing reels to Angler’s Warehouse. Immediately prior to this sale, Sports World perpetual inventory records for Ace-5 reels included the following cost layers.
Note: We present this problem in the normal sequence of the accounting cycle—that is, journal entries before ledger entries. However, you may find it helpful to work part b first.
- Prepare a separate journal entry to record the cost of goods sold relating to the January 15 sale of 1,000 Ace-5 reels, assuming that Sports World uses:
- Specific identification (500 of the units sold were purchased on December 12, and the remaining 500 were purchased on January 9).
- Average cost.
- page 377
Complete a subsidiary ledger record for Ace-5 reels using each of the four inventory valuation methods listed. Your inventory records should show both purchases of this product, the sale on January 15, and the balance on hand at December 12, January 9, and January 15. Use the formats for inventory subsidiary records illustrated on Exhibits 8–3 through 8-5 of this chapter.
- Refer to the cost of goods sold figures computed in part a. For financial reporting purposes, can the company use the valuation method that resulted in the lowestcost of goods sold if, for tax purposes, it used the method that resulted in the highest cost of goods sold? Explain.
The company invested $52,000 in a portfolio of marketable securities on December 22, year 1. The portfolio’s market value on December 31, year 1, had increased in value to $57,000.
On November 1, year 1, The Ski Factory sold 250 pairs of skis to Arctic Lodge for $130,000. The lodge paid $10,000 at the point of sale and issued a one-year, $120,000, 5 percent note for the remaining balance. The note, plus accrued interest, is due in full on October 31, year 2. The Ski Factory adjusts for accrued interest revenue monthly.
The Ski Factory uses a balance sheet approach to account for uncollectible accounts expense. Outstanding accounts receivable on December 31, year 1, total $900,000. After aging these accounts, the company estimates that their net realizable value is $870,000. Prior to making any adjustment to record uncollectible accounts expense, The Ski Factory’s Allowance for Doubtful Accounts has a credit balance of $8,000.
- Prepare the journal entry necessary to update the company’s accounts immediately after performing its bank reconciliation on December 31, year 1.
- page 335Prepare the journal entry necessary to adjust the company’s marketable securities to market value at December 31, year 1.
- Prepare the journal entry necessary to accrue interest in December, year 1.
- Prepare the journal entry necessary to report the company’s accounts receivable at their net realizable value at December 31, year 1.
- Discuss briefly how the entry performed in part daffects the accounts receivable turnover rate. Does the write-off of an account receivable affect the accounts receivable turnover rate differently than the entry performed in part d? Explain.
Disposal of Plant Assets
During the current year, Hitchcock Developers disposed of plant assets in the following transactions.
|Feb. 10||Office equipment costing $24,000 was given to a scrap dealer at no charge. At the date of disposal, accumulated depreciation on the office equipment amounted to $21,800.|
|Apr. 1||Hitchcock sold land and a building to Claypool Associates for $900,000, receiving $100,000 cash and a 5-year, 9 percent note receivable for the remaining balance. Hitchcock’s records showed the following amounts: Land, $50,000; Building, $550,000; Accumulated Depreciation: Building (at the date of disposal), $250,000.|
|Aug. 15||Hitchcock traded in an old truck for a new one. The old truck had cost $26,000, and its accumulated depreciation amounted to $18,000. The list price of the new truck was $39,000, but Hitchcock received a $10,000 trade-in allowance for the old truck and paid $28,000 in cash. Hitchcock includes trucks in its Vehicles account.|
|Oct. 1||Hitchcock traded in its old computer system as part of the purchase of a new system. The old system had cost $15,000, and its accumulated depreciation amounted to $11,000. The new computer’s list price was $8,000. Hitchcock accepted a trade-in allowance of $500 for the old computer system, paying $1,500 down in cash and issuing a 1-year, 8 percent note payable for the $6,000 balance owed.|
- Prepare journal entries to record each of the disposal transactions. Assume that depreciation expense on each asset has been recorded up to the date of disposal. Thus, you need not update the accumulated depreciation figures stated in the problem.
- Will the gains and losses recorded in part a affect the gross profit reported in Hitchcock’s income statement? Explain.
- Explain how the financial reporting of gains and losses on plant assets differs from the financial reporting of unrealized gains and losses on marketable securities discussed in Chapter 7.
Use of an Amortization Table
Glen Pool Club, Inc., has a $150,000 mortgage liability. The mortgage is payable in monthly installments of $1,543, which include interest computed at an annual rate of 12 percent (1 percent monthly).
- Prepare a partial amortization table showing (1) the original balance of this loan, and (2) the allocation of the first two monthly payments between interest expense and the reduction in the mortgage’s unpaid balance. (Round to the nearest dollar.)
- Prepare the journal entry to record the second monthly payment.
- Will monthly interest increase, decrease, or stay the same over the life of the loan? Explain your answer, including why in this case the amount of principal included in the first two payments is the same.
Reporting Liabilities in a Balance Sheet
The following items were taken from the accounting records of Murfreesboro Telephone Corporation (MTC) for the year ended December 31, 2018 (dollar amounts are in thousands).