Question 1:

During 2022, its first year of operations, the XYZ Company sold merchandise for
1,500,000cash.ThismerchandisecostXYZ
1,500,000cash.ThismerchandisecostXYZ900,000 (60% of the selling price).
Customers returned $80,000 of sales during 2022. XYZ uses a perpetual inventory
system. Record the journal entry for (i) Sales and (ii) Sales Returns.

1. Sales Entry:

XYZ Company sold merchandise worth $1,500,000, so the sales journal entry would be:

Journal Entry for Sales:

● Debit: Cash $1,500,000

● Credit: Sales Revenue $1,500,000

This reflects the cash received from the sale.

2. Sales Returns Entry:

Customers returned $80,000 worth of merchandise. Under the perpetual inventory

system, the cost of the returned goods also needs to be adjusted.

Journal Entry for Sales Returns:

● Debit: Sales Returns and Allowances $80,000

● Credit: Cash $80,000

This entry reverses the cash received for the returned merchandise.

3. Cost of Goods Sold Adjustment for Returns:

Now, under the perpetual system, we need to adjust the inventory for the returned
goods. Since the merchandise cost XYZ $900,000 (60% of the selling price), we can
calculate the cost of the returned merchandise:

Cost of returned merchandise=80,000×60%=48,000\text{Cost of returned merchandise}

= 80,000 \times 60\% = 48,000Cost of returned merchandise=80,000×60%=48,000

Journal Entry for Cost of Goods Sold (COGS) Adjustment:

 ● Debit: Inventory $48,000
● Credit: Cost of Goods Sold $48,000

Question 2:
During 2023, its first year of operations, the ABC Company sold merchandise for
3,000,000cash.ThismerchandisecostABC
3,000,000cash.ThismerchandisecostABC1,800,000 (60% of the selling price).
Customers returned $200,000 of sales during 2023. ABC uses a perpetual inventory
system. Record the journal entry for (i) Sales and (ii) Sales Returns.

1. Sales Entry:

ABC Company sold merchandise worth $3,000,000, so the sales journal entry would be:

Journal Entry for Sales:

● Debit: Cash $3,000,000

● Credit: Sales Revenue $3,000,000

This reflects the cash received from the sale.

2. Sales Returns Entry:

Customers returned $200,000 worth of merchandise. Under the perpetual inventory

system, the cost of the returned goods also needs to be adjusted.

Journal Entry for Sales Returns:

● Debit: Sales Returns and Allowances $200,000

● Credit: Cash $200,000

This entry reverses the cash received for the returned merchandise.

3. Cost of Goods Sold Adjustment for Returns:

Now, under the perpetual system, we need to adjust the inventory for the returned
goods. Since the merchandise cost ABC $1,800,000 (60% of the selling price), we can
calculate the cost of the returned merchandise:
Cost of returned merchandise=200,000×60%=120,000\text{Cost of returned
merchandise} = 200,000 \times 60\% = 120,000Cost of returned
merchandise=200,000×60%=120,000

Journal Entry for Cost of Goods Sold (COGS) Adjustment:

● Debit: Inventory $120,000

● Credit: Cost of Goods Sold $120,000

Question 1:
A manufacturer, GreenTech Inc., sells its products directly to consumers. The company
offers a one-year assurance-type warranty against defects for its products and an
extended 3-year service-type warranty for an additional cost of
150∗∗.Acustomerpurchasestheextendedwarrantyalongwitht
heproductandpaysatotalconsiderationof∗∗
150∗∗.Acustomerpurchasestheextendedwarrantyalongwiththeproductandpaysat
otalconsiderationof∗∗3,150 (
3,000fortheproductand
3,000fortheproductand150 for the service-type warranty).
Requirements:
1. Record the journal entry on the date of sale.
2. Record the journal entry on the sale date to recognize the assurance-type
warranty liability, estimated to be $80.
3. Record the journal entry for a claim against the assurance-type warranty during
Year 1, which involves 2 hours of labor at
4. 15perhour∗∗and∗∗partscosting
5. 15perhour∗∗and∗∗partscosting50.

1. Journal Entry on the Date of Sale:

The total consideration paid by the customer is $3,150 ($3,000 for the product and $150
for the extended warranty). We need to record the sale of both the product and the
extended warranty.

Journal Entry for Sale:

● Debit: Cash $3,150

● Credit: Sales Revenue $3,000 (for the product)
● Credit: Unearned Revenue $150 (for the service-type warranty)

This reflects the receipt of payment for both the product and the extended warranty.
The extended warranty revenue is unearned at the time of sale, so it is recorded as a
liability.

2. Journal Entry to Recognize the Assurance-Type Warranty Liability:

The estimated liability for the assurance-type warranty is $80. This liability is recognized
at the time of the sale.

Journal Entry for Assurance-Type Warranty Liability:

● Debit: Warranty Expense $80

● Credit: Warranty Liability $80

This reflects the liability for the assurance-type warranty that GreenTech Inc. expects to
incur over the product’s one-year warranty period.

3. Journal Entry for a Claim Against the Assurance-Type Warranty in Year 1:

A claim is made against the assurance-type warranty, and the costs are as follows:

● Labor: 2 hours at $15 per hour = $30

● Parts: $50

The total cost of the warranty claim is $30 (labor) + $50 (parts) = $80.

Journal Entry for Warranty Claim:

● Debit: Warranty Liability $80

● Credit: Cash (or Accounts Payable) $80

This reflects the payment for the warranty claim, which reduces the warranty liability.
Question 2:
A manufacturer, BlueWave Ltd., sells its products directly to consumers. The company
offers a one-year assurance-type warranty against defects for its products and an
extended 5-year service-type warranty for an additional cost of
300∗∗.Acustomerpurchasestheextendedwarrantyalongwitht
heproductandpaysatotalconsiderationof∗∗
300∗∗.Acustomerpurchasestheextendedwarrantyalongwiththeproductandpaysat
otalconsiderationof∗∗6,300 (
6,000fortheproductand
6,000fortheproductand300 for the service-type warranty).
Requirements:
1. Record the journal entry on the date of sale.
2. Record the journal entry on the sale date to recognize the assurance-type
warranty liability, estimated to be $120.
3. Record the journal entry for a claim against the assurance-type warranty during
Year 1, which involves 1.5 hours of labor at
4. 25perhour∗∗and∗∗partscosting
5. 25perhour∗∗and∗∗partscosting75.

When BlueWave Ltd. sells the product and the extended warranty, the total
consideration is $6,300 ($6,000 for the product and $300 for the service-type warranty).

Journal Entry for the Sale:

● Debit: Cash $6,300

● Credit: Sales Revenue $6,000
● Credit: Unearned Warranty Revenue $300

This reflects the sale of the product ($6,000) and the unearned revenue for the service-
type warranty ($300).

2. Journal Entry to Recognize the Assurance-Type Warranty Liability:

The company estimates that the liability for the one-year assurance-type warranty is
$120. This liability should be recognized on the sale date.

Journal Entry for the Assurance-Type Warranty Liability:

● Debit: Warranty Expense $120

● Credit: Warranty Liability $120

This reflects the recognition of the liability for the assurance-type warranty, which will
be settled as claims are made during the year.

3. Journal Entry for a Claim Against the Assurance-Type Warranty (During Year 1):

A customer makes a warranty claim during Year 1. The claim involves 1.5 hours of labor
at $25 per hour and parts costing $75.

The total cost of the claim is calculated as:

37.50+75=112.50

Journal Entry for the Warranty Claim:

● Debit: Warranty Liability $112.50

● Credit: Cash (or Accounts Payable) $112.50

Question 1:
On June 1, 2024, the ABC Electronics Company sold cameras to XYZ Sports. ABC
agreed to accept a $500,000, 6-month, 10% p.a. note in payment for the cameras.
Interest is receivable at maturity.
Requirements:
1. Record the journal entry in ABC’s books on the date of sale (June 1, 2024).
2. Record the journal entry on the date of cash receipt (December 1, 2024).

1. Journal Entry on the Date of Sale (June 1, 2024):

ABC Electronics sold cameras to XYZ Sports and agreed to accept a $500,000, 6-month,
10% p.a. note. The interest will be received at maturity.

To calculate the interest for 6 months:

● $25,000
Journal Entry for Sale:

● Debit: Notes Receivable $500,000

● Credit: Sales Revenue $500,000

This entry records the sale of the cameras and the note receivable. The interest will be
recorded separately when received.

2. Journal Entry on the Date of Cash Receipt (December 1, 2024):

When the cash is received at maturity (6 months later), ABC Electronics will receive the
principal amount plus the interest.

Journal Entry for Cash Receipt:

● Debit: Cash $525,000

● Credit: Notes Receivable $500,000
● Credit: Interest Revenue $25,000

Question 2:

On July 1, 2024, the PQR Tech Company sold cameras to LMN Sports. PQR agreed to
accept a $900,000, 6-month, 8% p.a. note in payment for the cameras. Interest is
receivable at maturity.
Requirements:
1. Record the journal entry in PQR’s books on the date of sale (July 1, 2024).
2. Record the journal entry on the date of cash receipt (January 1, 2025).

1. Journal Entry on the Date of Sale (July 1, 2024):

PQR Tech Company sold cameras to LMN Sports for $900,000 with a 6-month, 8%
annual interest note. The interest will be received at maturity.

To calculate the interest for 6 months:

36,000

Journal Entry for Sale:

● Debit: Notes Receivable $900,000

 ● Credit: Sales Revenue $900,000

This entry records the sale of the cameras and the note receivable. The interest will be
recorded separately when received.

2. Journal Entry on the Date of Cash Receipt (January 1, 2025):

When the cash is received at maturity (6 months later), PQR Tech will receive the
principal amount plus the interest.

Journal Entry for Cash Receipt:

● Debit: Cash $936,000

● Credit: Notes Receivable $900,000
● Credit: Interest Revenue $36,000

Question 1:
The Green Widgets Company manufactures widgets that it sells to retailers. On June 1,
2024, the company sold widgets to BlueMart Co. Green Widgets accepted a six-month,
800,000non−interest−bearingnote∗∗inexchangefordeliveri
nggoodsthathaveacashsalespriceof∗∗
800,000non−interest−bearingnote∗∗inexchangefordeliveringgoodsthathaveaca
shsalespriceof∗∗760,000.
Requirements:
1. Record the journal entry in Green Widgets’ books on the date of sale (June 1,
2024).
2. Record the journal entry on the date of cash receipt (December 1, 2024).

Green Widgets sold widgets to BlueMart Co. for a non-interest-bearing note with a face
value of $800,000. The cash sales price of the widgets is $760,000, and the difference
of $40,000 represents the implied interest (discount).

To calculate the implied interest:

Implied Interest=800,000−760,000=40,000\text{Implied Interest} =

800,000 - 760,000 = 40,000Implied Interest=800,000−760,000=40,000
Journal Entry for the Sale:

● Debit: Notes Receivable $800,000

● Credit: Sales Revenue $760,000
● Credit: Discount on Notes Receivable $40,000

This entry records the sale of the widgets, the non-interest-bearing note receivable, and
the discount on the note.

2. Journal Entry on the Date of Cash Receipt (December 1, 2024):

On the date of cash receipt (6 months later), Green Widgets will receive the full face
value of the note, i.e., $800,000.

Journal Entry for Cash Receipt:

● Debit: Cash $800,000

● Credit: Notes Receivable $800,000

Question 2:
The Red Gadgets Company manufactures widgets that it sells to retailers. On July 1,
2024, the company sold widgets to SuperStore Co. Red Gadgets accepted a six-month,
1,200,000non−interest−bearingnote∗∗inexchangefordelive
ringgoodsthathaveacashsalespriceof∗∗
1,200,000non−interest−bearingnote∗∗inexchangefordeliveringgoodsthathavea
cashsalespriceof∗∗1,140,000.
Requirements:
1. Record the journal entry in Red Gadgets’ books on the date of sale (July 1, 2024).
2. Record the journal entry on the date of cash receipt (January 1, 2025).

1. Journal Entry on the Date of Sale (July 1, 2024):

Red Gadgets sold widgets to SuperStore Co. for a non-interest-bearing note with a face value of
$1,200,000. The cash sales price of the widgets is $1,140,000, and the difference of $60,000
represents the implied interest (discount).
To calculate the implied interest:

Implied Interest=1,200,000−1,140,000=60,000\text{Implied Interest} = 1,200,000 - 1,140,000 =

60,000Implied Interest=1,200,000−1,140,000=60,000

Journal Entry for the Sale:

● Debit: Notes Receivable $1,200,000

● Credit: Sales Revenue $1,140,000
● Credit: Discount on Notes Receivable $60,000

This entry records the sale of the widgets, the non-interest-bearing note receivable, and the
discount on the note.

2. Journal Entry on the Date of Cash Receipt (January 1, 2025):

On the date of cash receipt (6 months later), Red Gadgets will receive the full face value of the
note, i.e., $1,200,000.

Journal Entry for Cash Receipt:

● Debit: Cash $1,200,000

● Credit: Notes Receivable $1,200,000

Question 1:
The following information is available for the ABC Corporation in USD:
● Inventory purchases (on account): $120,000
● Freight charges on purchases (paid in cash): $8,000
● Inventory returned to suppliers (for credit): $10,000
● Sales (on account): $200,000
● Sales Returns: $15,000
Requirement:
Applying the periodic inventory system, prepare the journal entries that summarize the
transactions that created these balances.

1. Inventory Purchases (on Account):

Inventory purchases are made on account for $120,000.

Journal Entry:
 ● Debit: Purchases $120,000
● Credit: Accounts Payable $120,000

This entry records the purchase of inventory on account.

2. Freight Charges on Purchases (Paid in Cash):

Freight charges for the inventory purchase amount to $8,000 and are paid in cash.

Journal Entry:

● Debit: Freight-In (or Transportation-In) $8,000

● Credit: Cash $8,000

This entry reflects the payment for freight charges, which is added to the cost of goods
purchased.

3. Inventory Returned to Suppliers (for Credit):

Inventory worth $10,000 is returned to suppliers on credit.

Journal Entry:

● Debit: Accounts Payable $10,000

● Credit: Purchase Returns and Allowances $10,000

This entry reflects the return of inventory to suppliers, reducing the accounts payable
and adjusting the purchase returns.

4. Sales (on Account):

Sales of $200,000 are made on account.

Journal Entry:

● Debit: Accounts Receivable $200,000

● Credit: Sales Revenue $200,000

This entry records the revenue generated from the sale of goods on account.

5. Sales Returns:

Sales returns amounting to $15,000 are recorded.

Journal Entry:
 ● Debit: Sales Returns and Allowances $15,000
● Credit: Accounts Receivable $15,000

Question 2:

The following information is available for the XYZ Corporation in USD:

● Inventory purchases (on account): $180,000
● Freight charges on purchases (paid in cash): $12,000
● Inventory returned to suppliers (for credit): $15,000
● Sales (on account): $300,000
● Sales Returns: $20,000
Requirement:
Applying the periodic inventory system, prepare the journal entries that summarize the
transactions that created these balances.

1. Inventory Purchases (on Account):

Inventory purchases made on account amount to $180,000.

Journal Entry:

● Debit: Purchases $180,000

● Credit: Accounts Payable $180,000

This entry records the purchase of inventory on account.

2. Freight Charges on Purchases (Paid in Cash):

Freight charges related to the inventory purchases are $12,000, and they are paid in
cash.

Journal Entry:

● Debit: Freight-In (or Transportation-In) $12,000

● Credit: Cash $12,000

This entry reflects the payment of freight charges, which are added to the cost of
inventory.

3. Inventory Returned to Suppliers (for Credit):

Inventory worth $15,000 is returned to suppliers on credit.

Journal Entry:

● Debit: Accounts Payable $15,000

● Credit: Purchase Returns and Allowances $15,000

This entry reflects the return of inventory to suppliers, reducing the accounts payable
and adjusting the purchase returns.

4. Sales (on Account):

Sales of $300,000 are made on account.

Journal Entry:

● Debit: Accounts Receivable $300,000

● Credit: Sales Revenue $300,000

This entry records the revenue generated from sales made on account.

5. Sales Returns:

Sales returns amounting to $20,000 are recorded.

Journal Entry:

● Debit: Sales Returns and Allowances $20,000

● Credit: Accounts Receivable $20,000

Question 1:
The following information is available for the M Corporation:
● Inventory purchases (on account): $200,000
● Freight charges on purchases (paid in cash): $15,000
● Inventory returned to suppliers (for credit): $10,000
● Sales (on account): $400,000
● Cost of inventory sold: $180,000
Requirement:
Applying a perpetual inventory system, prepare the journal entries that summarize the
transactions that created these balances.

1. Inventory Purchases (on Account):

Inventory is purchased on account for $200,000.

Journal Entry:

● Debit: Inventory $200,000

● Credit: Accounts Payable $200,000

This entry records the purchase of inventory on account, directly updating the inventory
balance.

2. Freight Charges on Purchases (Paid in Cash):

Freight charges for the inventory purchase are $15,000, and they are paid in cash.

Journal Entry:

● Debit: Inventory $15,000

● Credit: Cash $15,000

This entry reflects the payment of freight charges, which are added to the inventory
balance.

3. Inventory Returned to Suppliers (for Credit):

Inventory worth $10,000 is returned to suppliers on credit.

Journal Entry:

● Debit: Accounts Payable $10,000

● Credit: Inventory $10,000

This entry reflects the return of inventory, reducing both accounts payable and
inventory.

4. Sales (on Account):

Sales of $400,000 are made on account.

Journal Entry:

● Debit: Accounts Receivable $400,000

● Credit: Sales Revenue $400,000

This entry records the revenue from sales made on account.

5. Cost of Inventory Sold (COGS):

Cost of inventory sold is $180,000.

Journal Entry:

● Debit: Cost of Goods Sold $180,000

● Credit: Inventory $180,000

Question 2:
The following information is available for the N Corporation:
● Inventory purchases (on account): $350,000
● Freight charges on purchases (paid in cash): $25,000
● Inventory returned to suppliers (for credit): $30,000
● Sales (on account): $600,000
● Cost of inventory sold: $320,000
Requirement:
Applying a perpetual inventory system, prepare the journal entries that summarize the
transactions that created these balances

1. Inventory Purchases (on Account):

Inventory is purchased on account for $350,000.

Journal Entry:

● Debit: Inventory $350,000

● Credit: Accounts Payable $350,000

This entry records the purchase of inventory on account, immediately updating the
inventory balance.
2. Freight Charges on Purchases (Paid in Cash):

Freight charges for the inventory purchase amount to $25,000, paid in cash.

Journal Entry:

● Debit: Inventory $25,000

● Credit: Cash $25,000

This entry reflects the payment of freight charges, adding to the inventory balance.

3. Inventory Returned to Suppliers (for Credit):

Inventory worth $30,000 is returned to suppliers on credit.

Journal Entry:

● Debit: Accounts Payable $30,000

● Credit: Inventory $30,000

This entry reflects the return of inventory, reducing both accounts payable and
inventory.

4. Sales (on Account):

Sales of $600,000 are made on account.

Journal Entry:

● Debit: Accounts Receivable $600,000

● Credit: Sales Revenue $600,000

This entry records the revenue from sales made on account.

5. Cost of Inventory Sold (COGS):

Cost of inventory sold is $320,000.

Journal Entry:

● Debit: Cost of Goods Sold $320,000

● Credit: Inventory $320,000

This entry records the cost of inventory that has been sold, reducing the inventory
balance.
Question 1 (Based on Part a):

The Greenfield Company offers 30 days of credit to its customers. The company began 2023 with
the following balances in its accounts:

● Accounts receivable: $400,000

● Allowance for uncollectible accounts: ($40,000)
● Net accounts receivable: $360,000

During 2023, sales on credit were

1,500,000∗∗,cashcollectionsfromcustomerswere∗∗

1,500,000∗∗,cashcollectionsfromcustomerswere∗∗1,450,000, and actual write-offs of

accounts were $30,000.

Below is the Accounts Receivable Aging on December 31, 2023:

Age Group Amount Estimated Percent Uncollectible

0–60 days $300,000 5%

61–90 days $90,000 10%

91–120 days $40,000 20%

Over 121 days $15,000 40%

Required:

1. Determine the balances in accounts receivable and allowance for uncollectible accounts at
the end of 2023.
2. Determine the bad debt expense for 2023.
3. Prepare journal entries to write off receivables and to recognize bad debt expense for 2023.

1. Determine the balances in accounts receivable and allowance for uncollectible accounts at the
end of 2023:

● Accounts Receivable at December 31, 2023:

○ Beginning balance: $400,000
○ Credit sales during 2023: $1,500,000
○ Cash collections: $1,450,000
○ Write-offs during 2023: $30,000
● Calculation:
Ending Accounts Receivable=Beginning Accounts Receivable+Credit
Sales−Cash Collections−Write-offs\text{Ending Accounts Receivable} =
\text{Beginning Accounts Receivable} + \text{Credit Sales} - \text{Cash
Collections} - \text{Write-offs}Ending Accounts Receivable=Beginning
Accounts Receivable+Credit Sales−Cash Collections−Write-offs Ending
Accounts
Receivable=400,000+1,500,000−1,450,000−30,000=420,000\text{Ending
Accounts Receivable} = 400,000 + 1,500,000 - 1,450,000 - 30,000 =
420,000Ending Accounts
Receivable=400,000+1,500,000−1,450,000−30,000=420,000
So, ending accounts receivable at December 31, 2023, is $420,000.

2. Determine the allowance for uncollectible accounts at the end of 2023:

Aging Schedule:
 Age Group Amount Estimated Percent Uncollectible Uncollectible Amount

0-60 days $300,000 5% $15,000

61-90 days $90,000 10% $9,000

91-120 days $40,000 20% $8,000

Over 121 days $15,000 40% $6,000

Total $445,000 $38,000

The required balance in the allowance for uncollectible accounts at December 31, 2023, is $38,000.

3. Determine the bad debt expense for 2023:

● Allowance for uncollectible accounts at the beginning of 2023: $40,000 (credit balance)
● Allowance for uncollectible accounts at the end of 2023: $38,000 (required balance)

Bad Debt Expense Calculation:

Bad Debt Expense = Ending Allowance - Beginning Allowance + Write-offs

Bad Debt Expense = $38,000 - $40,000 + $30,000

Bad Debt Expense = $28,000

So, the bad debt expense for 2023 is $28,000.

4. Journal Entries:

● Write-off of Receivables:
Write-offs during 2023 amounted to $30,000.
Journal Entry:
○ Debit: Allowance for Uncollectible Accounts $30,000
○ Credit: Accounts Receivable $30,000

Question 2 (Based on Part b):

SportsPro, Inc., is a leading manufacturer of sports apparel, shoes, and equipment. The company’s
financial statements contain the following information ($ in millions):

Year Ending December 31, 2025:

● Accounts receivable, NET: $4,200

● Sales revenue: $38,500
● Allowance for uncollectible accounts: $25
● Bad Debts: $50

Year Ending December 31, 2024:

 ● Accounts receivable, NET: $3,800
● Sales revenue: $36,000
● Allowance for uncollectible accounts: $30

Assume that all sales are made on a credit basis.

Required:

1. What is the amount of gross (total) accounts receivable due from customers at the end of
2025 and 2024?
2. What is the amount of bad debt write-offs during 2025?
3. Analyze changes in the gross accounts receivable account to calculate the amount of cash
received from customers during 2025.

1. Gross (Total) Accounts Receivable at the End of 2025 and 2024

Gross Accounts Receivable = Net Accounts Receivable + Allowance for Uncollectible Accounts

For 2025:

● Net Accounts Receivable (2025) = $4,200 million

● Allowance for Uncollectible Accounts (2025) = $25 million

Gross Accounts Receivable (2025) = $4,200 million + $25 million = $4,225 million

For 2024:

● Net Accounts Receivable (2024) = $3,800 million

● Allowance for Uncollectible Accounts (2024) = $30 million

Gross Accounts Receivable (2024) = $3,800 million + $30 million = $3,830 million

2. Amount of Bad Debt Write-offs During 2025

Bad Debt Write-offs = Allowance for Uncollectible Accounts (beginning of year) + Bad Debt Expense
(or actual bad debts) - Allowance for Uncollectible Accounts (end of year)
We know that:

● Allowance for Uncollectible Accounts (2024) = $30 million

● Bad Debts (for 2025) = $50 million
● Allowance for Uncollectible Accounts (2025) = $25 million

Using the formula:

Bad Debt Write-offs = $30 million (beginning) + $50 million (Bad Debts) - $25 million (ending)
Bad Debt Write-offs = $55 million

3. Cash Received from Customers During 2025

We use the formula to calculate cash collections from customers based on the change in gross
accounts receivable:

Cash Received from Customers = Sales Revenue + Beginning Gross Accounts Receivable - Ending
Gross Accounts Receivable - Bad Debt Write-offs

We know:

● Sales Revenue (2025) = $38,500 million

● Beginning Gross Accounts Receivable (2024) = $3,830 million
● Ending Gross Accounts Receivable (2025) = $4,225 million
● Bad Debt Write-offs = $55 million

Cash Received from Customers = $38,500 million + $3,830 million - $4,225 million - $55 million
Cash Received from Customers = $38,050 million

Question 1 (Based on Part a):

XYZ Company sells a group of its receivables with a face value of $150,000 to a factor.
● The factoring fee is 2%.
● The factor holds back 6% of the face value of the receivables to cover customer
returns.
● The weighted average number of days to the receivables’ due dates is 30 days.
● The sale is with recourse, and the Fair Value of the recourse liability is $4,500.
Requirement:
1. Record the journal entry for the above transaction in XYZ’s books.
2. If the factor subsequently collects all of the receivables (i.e., NIL recourse
liability), record the journal entry.
 3. If the factor subsequently collects part of the receivables (say $3,000 turned out
to be uncollectible), record the journal entry.
4. If a portion of sales (say
5. 3,000∗∗representedbyreceivables)isreturned,andthefa
ctorpaysXYZ∗∗
6. 3,000∗∗representedbyreceivables)isreturned,andthefactorpaysXYZ∗∗4,0
00, record the journal entry.

1. Journal Entry for the Sale of Receivables to the Factor:

Given:

● Face value of receivables = $150,000

● Factoring fee = 2% of $150,000 = $3,000
● Holdback = 6% of $150,000 = $9,000
● Recourse liability = $4,500 (Fair Value)
● Amount received from the factor = $150,000 - $3,000 - $9,000 - $4,500 =
$133,500

Journal Entry:

● Debit: Cash $133,500 (amount received from the factor)

● Debit: Loss on Sale of Receivables $3,000 (factoring fee)
● Debit: Recourse Liability $4,500 (fair value of recourse liability)
● Debit: Allowance for Returns $9,000 (holdback amount)
● Credit: Accounts Receivable $150,000 (face value of the receivables sold)

Explanation: The receivables are sold to the factor with a factoring fee, a holdback, and
a recourse liability. The factoring fee, holdback, and recourse liability are recorded as
separate entries.

2. Journal Entry When the Factor Collects All Receivables (NIL Recourse
Liability):

Given: The factor collects all of the receivables, so the recourse liability is no longer
required.
Journal Entry:

● Debit: Recourse Liability $4,500 (removal of recourse liability)

● Credit: Cash $4,500 (payment to XYZ Company for the recourse liability)

Explanation: Since the factor collects all of the receivables, the recourse liability is
cleared, and XYZ receives payment for that amount.

3. Journal Entry if $3,000 of Receivables Turn Out to Be Uncollectible:

Given: $3,000 of the receivables turn out to be uncollectible.

Journal Entry:

● Debit: Recourse Liability $3,000 (amount uncollected, covered by recourse)

● Credit: Cash $3,000 (amount paid by the factor for the uncollected portion)

Explanation: Since the sale was with recourse, XYZ receives compensation from the
factor for the uncollected portion of the receivables.

4. Journal Entry if a Portion of Sales is Returned (e.g., $3,000 Returned, and the
Factor Pays XYZ $4,000):

Given: The factor returns $3,000 of receivables to XYZ, and the factor pays XYZ $4,000
(greater than the return value).

Journal Entry:

● Debit: Accounts Receivable $3,000 (to reinstate the returned portion of

receivables)
● Debit: Cash $4,000 (payment received from the factor)
● Credit: Allowance for Returns $3,000 (to reverse the holdback)
● Credit: Gain on Return of Receivables $1,000 (difference between cash received
and receivables returned)

Question 2 (Based on Part b):

Glow Beauty Company sells its products to customers on a credit basis. An adjusting
entry for bad debt expense is recorded only at December 31, the company’s fiscal year-
end.
The 2022 balance sheet disclosed the following:
● Receivables, net of allowance for uncollectible accounts of
● 25,000∗∗:∗∗
● 25,000∗∗:∗∗400,000
During 2023, credit sales were
2,000,000∗∗,cashcollectionsfromcustomerswere∗∗
2,000,000∗∗,cashcollectionsfromcustomerswere∗∗1,900,000, and
40,000∗∗inaccountsreceivablewerewrittenoff.Inaddition,∗∗
40,000∗∗inaccountsreceivablewerewrittenoff.Inaddition,∗∗5,000 was collected
from a customer whose account was written off in 2022.
An aging of accounts receivable at December 31, 2023, reveals the following:
Age Group % of Y.E. Receivables in Group % Uncollectible

0–60 days 60% 3%

61–90 days 25% 10%

91–120 days 10% 20%

Over 120 5% 50%

days
Requirement:
1. Prepare summary journal entries to account for the 2023 write-offs and the
collection of the receivable previously written off.
2. Prepare the year-end adjusting entry for bad debts according to each of the
following situations:
a. Bad debt expense is estimated to be 2% of credit sales for the year.
b. The allowance for uncollectible accounts is estimated to be 8% of the year-end
balance in accounts receivable.
c. The allowance for uncollectible accounts is determined by an aging of
accounts receivable.
Part 1: Journal Entries for Write-Offs and Collection of Previously Written-
Off Accounts

Write-Off of Accounts Receivable in 2023:

● Debit: Allowance for Uncollectible Accounts $40,000 (write-off of uncollectible accounts)

● Credit: Accounts Receivable $40,000 (removal of accounts from the books)

Collection of Previously Written-Off Account (from 2022):

● Debit: Accounts Receivable $5,000 (restoring the account previously written off)
● Credit: Allowance for Uncollectible Accounts $5,000 (restoring the allowance)

Part 2: Year-End Adjusting Entry for Bad Debts

Situation (a): Bad Debt Expense is Estimated to be 2% of Credit Sales

● Credit Sales in 2023 = $2,000,000

● Bad Debt Expense = 2% of $2,000,000 = $40,000

Journal Entry for Bad Debt Expense (2% of Credit Sales):

● Debit: Bad Debt Expense $40,000

● Credit: Allowance for Uncollectible Accounts $40,000

Situation (b): The Allowance for Uncollectible Accounts is Estimated to be 8% of Year-

End Accounts Receivable

● Ending Accounts Receivable (net) = $400,000

● Allowance for Uncollectible Accounts Needed = 8% of $400,000 = $32,000

Since the beginning balance of the allowance account was $25,000, and $40,000 was written
off, the balance after the write-offs is:

● Allowance for Uncollectible Accounts = $25,000 - $40,000 = -$15,000

To adjust the allowance for the required balance of $32,000:

● Required Adjustment = $32,000 - (-$15,000) = $47,000

Journal Entry for Bad Debt Expense (8% of Year-End Receivables):

● Debit: Bad Debt Expense $47,000

● Credit: Allowance for Uncollectible Accounts $47,000
Situation (c): The Allowance for Uncollectible Accounts is Determined by Aging of
Accounts Receivable

● Aging of Accounts Receivable:

○ 0–60 days: 60% of total receivables, with 3% uncollectible
■ $400,000 × 60% = $240,000
■ Uncollectible: $240,000 × 3% = $7,200
○ 61–90 days: 25% of total receivables, with 10% uncollectible
■ $400,000 × 25% = $100,000
■ Uncollectible: $100,000 × 10% = $10,000
○ 91–120 days: 10% of total receivables, with 20% uncollectible
■ $400,000 × 10% = $40,000
■ Uncollectible: $40,000 × 20% = $8,000
○ Over 120 days: 5% of total receivables, with 50% uncollectible
■ $400,000 × 5% = $20,000
■ Uncollectible: $20,000 × 50% = $10,000
● Total Uncollectible Allowance Needed = $7,200 + $10,000 + $8,000 + $10,000 =
$35,200

After the write-offs, the balance in the allowance account is:

● Allowance for Uncollectible Accounts = $25,000 - $40,000 = -$15,000

To adjust the allowance for the required balance of $35,200:

● Required Adjustment = $35,200 - (-$15,000) = $50,200

Journal Entry for Bad Debt Expense (Aging of Accounts Receivable):

● Debit: Bad Debt Expense $50,200

● Credit: Allowance for Uncollectible Accounts $50,200

Summary of Journal Entries:

1. Write-Off of Accounts Receivable in 2023:

○ Debit: Allowance for Uncollectible Accounts $40,000
○ Credit: Accounts Receivable $40,000
2. Collection of Previously Written-Off Account (from 2022):
○ Debit: Accounts Receivable $5,000
○ Credit: Allowance for Uncollectible Accounts $5,000
3. Adjusting Entry for Bad Debt Expense:
○ For 2% of Credit Sales:
■ Debit: Bad Debt Expense $40,000
■ Credit: Allowance for Uncollectible Accounts $40,000
 ○ For 8% of Year-End Accounts Receivable:
■ Debit: Bad Debt Expense $47,000
■ Credit: Allowance for Uncollectible Accounts $47,000
○ For Aging of Accounts Receivable:
■ Debit: Bad Debt Expense $50,200
■ Credit: Allowance for Uncollectible Accounts $50,200

Question 1 (Based on Part i, ii, and iii):

(i) Explain LIFO Reserve (2 marks).

(ii) Explain LIFO Liquidation (3 marks).

(iii) Sparkle Corporation uses perpetual FIFO throughout the year to maintain internal
records. These amounts are adjusted to LIFO for financial reporting purposes.
Assume the company began 2022 with a balance of:
● LIFO Reserve Account (2022 opening balance): $400,000 Credit
By the end of 2022, the ending inventory (EI) per LIFO was
380,000∗∗,andperFIFOwas∗∗
380,000∗∗,andperFIFOwas∗∗900,000.
Requirement:
Determine the LIFO Reserve adjustment required at the end of 2022 and provide the
journal entry (5 marks).

(i) LIFO Reserve (2 marks)

The LIFO Reserve is the difference between the inventory reported under the FIFO
(First-In, First-Out) method and the LIFO (Last-In, First-Out) method. It is used to
reconcile the two methods since companies may use FIFO for internal reporting but
report using LIFO for external financial reporting. The LIFO reserve represents the
amount by which the FIFO inventory is greater than the LIFO inventory. This reserve can
be used to adjust the financial statements for the effects of the LIFO method.

(ii) LIFO Liquidation (3 marks)

LIFO Liquidation refers to the reduction of inventory levels under the LIFO method.
When inventory is sold, older, less costly inventory is typically recognized as a cost of
goods sold (COGS). If the inventory level decreases and older inventory is sold off
(liquidated), it can result in a LIFO liquidation. This leads to the recognition of old
inventory at lower costs, which may cause a temporary increase in profits because the
old, lower-cost inventory is now being recognized as revenue, rather than the more
expensive, recently acquired inventory. This can distort the true profitability of a
company.

(iii) LIFO Reserve Adjustment Calculation and Journal Entry (5 marks)

Given Information:

● Opening LIFO Reserve (2022): $400,000 Credit

● Ending Inventory (per LIFO): $380,000
● Ending Inventory (per FIFO): $900,000

Step 1: Calculate the LIFO Reserve Adjustment

The LIFO Reserve is the difference between FIFO and LIFO inventory. We can calculate
the change in the LIFO reserve at the end of the year.

LIFO Reserve at the end of 2022=FIFO Ending Inventory−LIFO Ending

Inventory\text{LIFO Reserve at the end of 2022} = \text{FIFO Ending
Inventory} - \text{LIFO Ending Inventory}LIFO Reserve at the end of
2022=FIFO Ending Inventory−LIFO Ending Inventory LIFO Reserve at the
end of 2022=900,000−380,000=520,000\text{LIFO Reserve at the end of
2022} = 900,000 - 380,000 = 520,000LIFO Reserve at the end of
2022=900,000−380,000=520,000

Step 2: Determine the Required Adjustment

Now, we need to calculate the adjustment required to reconcile the opening LIFO
reserve balance to the ending balance.

Required Adjustment=Ending LIFO Reserve−Opening LIFO

Reserve\text{Required Adjustment} = \text{Ending LIFO Reserve} -
\text{Opening LIFO Reserve}Required Adjustment=Ending LIFO
Reserve−Opening LIFO Reserve Required
Adjustment=520,000−400,000=120,000\text{Required Adjustment} =
520,000 - 400,000 = 120,000Required
Adjustment=520,000−400,000=120,000

This means an additional $120,000 is needed to adjust the LIFO reserve.

Step 3: Journal Entry

To record the adjustment to the LIFO reserve, we make the following journal entry:

Journal Entry:

vbnet
Copy
Debit: LIFO Reserve Adjustment 120,000
Credit: Allowance to LIFO Reserve 120,000

Question 2 (Based on Part OR):

On January 1, 2022, the Brighton Company adopted the dollar-value LIFO method. The
inventory value on this date was $600,000. Inventory data for 2022 through 2025 are as
follows:
Date Ending Inventory at Year-End Costs ($) Cost Index

12/31/202 $650,000 1.10

2

12/31/202 $700,000 1.15

3

12/31/202 $750,000 1.20

4

12/31/202 $800,000 1.25

5
Requirement:
Calculate Brighton’s ending inventory for the years 2022 through 2025 using the dollar-
value LIFO method.
Step 1: Calculate the inventory at base-year costs (2022).

Since the company adopted the dollar-value LIFO method on January 1, 2022, the beginning
inventory value of $600,000 is the starting point.

Step 2: Apply the formula for each subsequent year:

For the Year Ending December 31, 2022:

Ending Inventory at LIFO (2022)=Ending Inventory at Current Costs (2022)Cost Index
(2022)\text{Ending Inventory at LIFO (2022)} = \frac{\text{Ending Inventory at Current Costs
(2022)}}{\text{Cost Index (2022)}}Ending Inventory at LIFO (2022)=Cost Index (2022)Ending
Inventory at Current Costs (2022) Ending Inventory at LIFO
(2022)=650,0001.10=590,909.09\text{Ending Inventory at LIFO (2022)} = \frac{650,000}{1.10} =
590,909.09Ending Inventory at LIFO (2022)=1.10650,000=590,909.09

For the Year Ending December 31, 2023:

Ending Inventory at LIFO (2023)=Ending Inventory at Current Costs (2023)Cost Index
(2023)\text{Ending Inventory at LIFO (2023)} = \frac{\text{Ending Inventory at Current Costs
(2023)}}{\text{Cost Index (2023)}}Ending Inventory at LIFO (2023)=Cost Index (2023)Ending
Inventory at Current Costs (2023) Ending Inventory at LIFO
(2023)=700,0001.15=608,695.65\text{Ending Inventory at LIFO (2023)} = \frac{700,000}{1.15} =
608,695.65Ending Inventory at LIFO (2023)=1.15700,000=608,695.65

For the Year Ending December 31, 2024:

Ending Inventory at LIFO (2024)=Ending Inventory at Current Costs (2024)Cost Index
(2024)\text{Ending Inventory at LIFO (2024)} = \frac{\text{Ending Inventory at Current Costs
(2024)}}{\text{Cost Index (2024)}}Ending Inventory at LIFO (2024)=Cost Index (2024)Ending
Inventory at Current Costs (2024) Ending Inventory at LIFO
(2024)=750,0001.20=625,000\text{Ending Inventory at LIFO (2024)} = \frac{750,000}{1.20} =
625,000Ending Inventory at LIFO (2024)=1.20750,000=625,000

For the Year Ending December 31, 2025:

Ending Inventory at LIFO (2025)=Ending Inventory at Current Costs (2025)Cost Index
(2025)\text{Ending Inventory at LIFO (2025)} = \frac{\text{Ending Inventory at Current Costs
(2025)}}{\text{Cost Index (2025)}}Ending Inventory at LIFO (2025)=Cost Index (2025)Ending
Inventory at Current Costs (2025) Ending Inventory at LIFO
(2025)=800,0001.25=640,000\text{Ending Inventory at LIFO (2025)} = \frac{800,000}{1.25} =
640,000Ending Inventory at LIFO (2025)=1.25800,000=640,000
Step 3: Calculate the ending inventory for each year, adjusted for LIFO
layers:

1. 2022: The starting inventory is $600,000 at base costs. The ending inventory at base
costs is $590,909.09.
○ LIFO Layer for 2022 = Ending Inventory at LIFO (2022) - Beginning Inventory
○ LIFO Layer for 2022 = $590,909.09 - $600,000 = -$9,090.91
2. 2023: The ending inventory at LIFO for 2023 is $608,695.65. The change in inventory
from 2022 to 2023 is adjusted with the cost index.
○ LIFO Layer for 2023 = $608,695.65 - $590,909.09 = $17,786.56
3. 2024: The ending inventory at LIFO for 2024 is $625,000. The change in inventory from
2023 to 2024 is adjusted with the cost index.
○ LIFO Layer for 2024 = $625,000 - $608,695.65 = $16,304.35
4. 2025: The ending inventory at LIFO for 2025 is $640,000. The change in inventory from
2024 to 2025 is adjusted with the cost index.
○ LIFO Layer for 2025 = $640,000 - $625,000 = $15,000

Question 1 (Based on Part 1):

Maharashtra Wholesale uses LIFO to value its inventory. The company sells several
inventory items. Details of two inventory items (X and Y) are as follows:
Item X Y

Hist. Cost $12 $18

Selling Price $25 $28

Cost to Sell $3 $2

Profit % 28% 25%

Replacement $13 $17.

Cost 5
Requirement:
Determine the ending inventory carrying value for Items X and Y using the lower of cost
or market (LCM) rule.
The Lower of Cost or Market (LCM) rule is used to value inventory. It requires that
inventory be recorded at the lower value between:
1. Historical Cost (what you paid for it), or
2. Market Value (what it’s worth now).

How is Market Value Calculated?

Market value is the middle value of these three amounts:
1. Replacement Cost (cost to buy the item now).
2. Net Realizable Value (NRV): Selling Price - Cost to Sell.
3. NRV minus Normal Profit Margin: NRV - (Profit % × Selling Price).

Item X:

● Historical Cost = $12 (what was paid for it)

● Market Value is calculated by comparing three values:
○ Replacement Cost = $13 (current cost to buy it)
○ NRV = $22 (Selling Price $25 minus Cost to Sell $3)
○ NRV minus Profit Margin = $15 (NRV $22 minus 28% profit on $25
selling price)
● Market Value = $15 (the middle value of $13, $22, and $15)

Now, the LCM Comparison:

● Historical Cost = $12

● Market Value = $15
● The lower value is $12, so Item X's ending inventory value is $12.

Item Y:

● Historical Cost = $18 (what was paid for it)

● Market Value is calculated by comparing three values:
○ Replacement Cost = $17.5 (current cost to buy it)
○ NRV = $26 (Selling Price $28 minus Cost to Sell $2)
○ NRV minus Profit Margin = $19 (NRV $26 minus 25% profit on $28
selling price)
● Market Value = $19 (the middle value of $17.5, $26, and $19)

Now, the LCM Comparison:

 ● Historical Cost = $18
● Market Value = $19
● The lower value is $18, so Item Y's ending inventory value is $18.

Final Answer:

● Item X: Ending Inventory = $12

● Item Y: Ending Inventory = $18
●

Question 2 (Based on Part OR):

The June 30, 2025, year-end trial balance for Bexley Company contained the following
information:
Account Debit Credit

Inventory July 1, 28K

2024

Sales Revenue 420K

Sales Returns 15K

Purchases 260K

Purchase Discounts 8K

Purchase Returns 12K

Freight-in 20K

In addition, you determine that the June 30, 2025, inventory balance is $45,000.
Requirement:
Calculate the cost of goods sold for the Bexley Company for the year ending June 30,
2025.
 COGS=Beginning Inventory+Net Purchases−Ending
Inventory

Step 1: Gather the Given Data

1. Beginning Inventory (July 1, 2024): $28,000
2. Purchases: $260,000
3. Purchase Discounts: $8,000
4. Purchase Returns: $12,000
5. Freight-in: $20,000
6. Ending Inventory (June 30, 2025): $45,000

Step 2: Calculate Net Purchases

Net Purchases = Purchases - Purchase Discounts - Purchase Returns + Freight-in

Net Purchases=260,000−8,000−12,000+20,000=260,000

Net Purchases=260,000−8,000−12,000+20,000=260,000

Step 3: Calculate Cost of Goods Available for Sale

Cost of Goods Available for Sale = Beginning Inventory + Net Purchases

Cost of Goods Available for Sale=28,000+260,000=288,000

Cost of Goods Available for Sale=28,000+260,000=288,000

Step 4: Calculate Cost of Goods Sold (COGS)

COGS = Cost of Goods Available for Sale - Ending Inventory

COGS=288,000−45,000=243,000
 COGS=288,000−45,000=243,000

Final Answer:
The Cost of Goods Sold (COGS) for Bexley Company for the year ending June 30, 2025,
is $243,000.

Question 3 (Based on Part II):

The M Company’s inventory balance on December 31, 2022, was $180,000 (based on a
12/31/2022 physical count) before considering the following transactions:
1. Goods shipped to M Co. f.o.b. destination on December 22, 2022, were received
on January 6, 2023. The invoice cost was $35,000.
2. Goods shipped to M Co. f.o.b. shipping point on December 29, 2022, were
received on January 7, 2023. The invoice cost was $20,000.
3. Goods shipped from M Co. to a customer f.o.b. destination on December 28,
2022, were received by the customer on January 4, 2023. The sales price was
4. 50,000∗∗,andthemerchandisecostwas∗∗
5. 50,000∗∗,andthemerchandisecostwas∗∗25,000.
6. Goods shipped from M Co. to a customer f.o.b. destination on December 27,
2022, were received by the customer on December 31, 2022. The sales price was
7. 30,000∗∗,andthemerchandisecostwas∗∗
8. 30,000∗∗,andthemerchandisecostwas∗∗15,000.
Requirement:
Determine the correct inventory amount to be reported in M’s 2022 balance sheet\

Key Rules:
1. Goods shipped to M Co. (Purchases):
○ FOB Destination: Ownership transfers when goods reach M Co. (not
included in 2022 inventory).
 ○ FOB Shipping Point: Ownership transfers when goods are shipped
(included in 2022 inventory).
2. Goods shipped from M Co. (Sales):
○ FOB Destination: Ownership transfers when goods reach the customer
(included in 2022 inventory).
○ FOB Shipping Point: Ownership transfers when goods are shipped (not
included in 2022 inventory).

Step-by-Step Adjustments:

1. Goods Shipped to M Co. (Purchases):

● FOB Destination (Received on January 6, 2023):
○ Invoice Cost = $35,000
○ Action: Exclude from 2022 inventory (ownership not yet transferred).
● FOB Shipping Point (Received on January 7, 2023):
○ Invoice Cost = $20,000
○ Action: Include in 2022 inventory (ownership transferred on shipment).

2. Goods Shipped from M Co. (Sales):

● FOB Destination (Received by Customer on January 4, 2023):
○ Merchandise Cost = $25,000
○ Action: Include in 2022 inventory (ownership not yet transferred).
● FOB Destination (Received by Customer on December 31, 2022):
○ Merchandise Cost = $15,000
○ Action: Exclude from 2022 inventory (ownership transferred on receipt).

Adjustments to Inventory:
1. Starting Inventory (Physical Count): $180,000
2. Add: Goods shipped FOB Shipping Point (Purchases): $20,000
3. Add: Goods shipped FOB Destination (Sales): $25,000

Question 1:
You are the CFO of Skyline Wholesale Beverage Company, which purchases soft drinks
from producers and then sells them to retailers. Your company began the year with
merchandise inventory of $100,000 on hand. Your company uses the gross method to
record inventory transactions.
During the year, additional inventory transactions include:
1. Purchases of merchandise on account totaled $500,000, with terms 2/10, n/30.
2. Freight charges paid were $12,000.
3. Merchandise with a cost of $15,000 was returned to suppliers for credit.
4. All purchases on account were paid within the discount period.
5. Sales on account totaled
6. 700,000∗∗.Thecostofsoftdrinkssoldwas∗∗
7. 700,000∗∗.Thecostofsoftdrinkssoldwas∗∗450,000.
8. Inventory remaining on hand at the end of the year totaled $140,000.
Requirement:
1. Record the necessary journal entries for the transactions according to the
perpetual inventory system using the gross method.
2. Record the above transactions according to the periodic inventory system using
the gross method.
3. Mention 2 advantages of using the perpetual system over the periodic system.

1. Beginning Inventory:

● Date: January 1, 2022

● Journal Entry:

plaintext
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Debit: Merchandise Inventory $100,000
Credit: Retained Earnings (or Opening Bal) $100,000

2. Purchases of Merchandise on Account:

● Date: During the year (specific date)

● Journal Entry (Gross Method):

plaintext
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 Debit: Merchandise Inventory $500,000
Credit: Accounts Payable $500,000

3. Freight Charges Paid:

● Date: During the year (specific date)

● Journal Entry:

plaintext
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Debit: Merchandise Inventory $12,000
Credit: Cash $12,000

4. Merchandise Returned to Suppliers:

● Date: During the year (specific date)

● Journal Entry:

plaintext
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Debit: Accounts Payable $15,000
Credit: Merchandise Inventory $15,000

5. Payment for Purchases (Within Discount Period):

● Date: During the year (specific date)

● Journal Entry:

plaintext
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Debit: Accounts Payable $485,000 (500,000 -
15,000 return)
 Credit: Cash $475,300 (485,000 -
2% discount)
Credit: Purchase Discounts $9,700 (2% of
$485,000)

6. Sales on Account:

● Date: During the year (specific date)

● Journal Entry:

plaintext
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Debit: Accounts Receivable $700,000
Credit: Sales Revenue $700,000

7. Cost of Goods Sold (COGS):

● Date: During the year (specific date)

● Journal Entry:

plaintext
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Debit: Cost of Goods Sold $450,000
Credit: Merchandise Inventory $450,000

8. End of Year Inventory:

● Date: December 31, 2022

● Journal Entry:

plaintext
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 Debit: Merchandise Inventory $140,000
Credit: Cost of Goods Sold $140,000

Periodic Inventory System (Gross Method)

The periodic inventory system updates the inventory balances at the end of the period,
so we don't update inventory as frequently as in the perpetual system. Here's how the
transactions would be recorded:

1. Beginning Inventory:

● Date: January 1, 2022

● Journal Entry:

plaintext
CopyEdit
Debit: Merchandise Inventory $100,000
Credit: Retained Earnings (or Opening Bal) $100,000

2. Purchases of Merchandise on Account:

● Date: During the year (specific date)

● Journal Entry (Gross Method):

plaintext
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Debit: Purchases $500,000
Credit: Accounts Payable $500,000

3. Freight Charges Paid:

● Date: During the year (specific date)

 ● Journal Entry:

plaintext
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Debit: Freight-In $12,000
Credit: Cash $12,000

4. Merchandise Returned to Suppliers:

● Date: During the year (specific date)

● Journal Entry:

plaintext
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Debit: Accounts Payable $15,000
Credit: Purchases $15,000

5. Payment for Purchases (Within Discount Period):

● Date: During the year (specific date)

● Journal Entry:

plaintext
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Debit: Accounts Payable $485,000 (500,000 -
15,000 return)
Credit: Cash $475,300 (485,000 -
2% discount)
Credit: Purchase Discounts $9,700 (2% of
$485,000)

6. Sales on Account:
 ● Date: During the year (specific date)
● Journal Entry:

plaintext
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Debit: Accounts Receivable $700,000
Credit: Sales Revenue $700,000

7. End of Year Inventory:

● Date: December 31, 2022

● Journal Entry:

plaintext
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Debit: Merchandise Inventory $140,000
Credit: Income Summary $140,000

At the end of the period, a physical count is done to determine the ending inventory,
which is then reflected in the Merchandise Inventory account.

Advantages of the Perpetual System over the Periodic System:

1. Real-Time Inventory Tracking: The perpetual system continuously updates

inventory and COGS with each transaction, which gives more accurate and timely
information. This is especially helpful for decision-making and tracking inventory
levels.
2. Improved Control: With real-time updates, the perpetual system makes it easier
to spot discrepancies, theft, or errors in the inventory at any given time, leading to
better control and management of stock.

Question 2:
You are the CFO of Oceanview Wholesale Beverage Company, which purchases soft
drinks from producers and then sells them to retailers. Your company began the year
with merchandise inventory of $150,000 on hand. Your company uses the gross
method to record inventory transactions.
During the year, additional inventory transactions include:
1. Purchases of merchandise on account totaled $700,000, with terms 1/10, n/30.
2. Freight charges paid were $18,000.
3. Merchandise with a cost of $25,000 was returned to suppliers for credit.
4. All purchases on account were paid within the discount period.
5. Sales on account totaled
6. 900,000∗∗.Thecostofsoftdrinkssoldwas∗∗
7. 900,000∗∗.Thecostofsoftdrinkssoldwas∗∗600,000.
8. Inventory remaining on hand at the end of the year totaled $200,000
Requirement:
1. Record the necessary journal entries for the transactions according to the
perpetual inventory system using the gross method.
2. Record the above transactions according to the periodic inventory system using
the gross method.
3. Mention 2 advantages of using the perpetual system over the periodic system.

1. Beginning Inventory:

● Date: January 1, 2022

● Journal Entry:

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Debit: Merchandise Inventory $150,000
Credit: Retained Earnings (or Opening Bal) $150,000

2. Purchases of Merchandise on Account:

● Date: During the year (specific date)

● Journal Entry:
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Debit: Merchandise Inventory $700,000
Credit: Accounts Payable $700,000

3. Freight Charges Paid:

● Date: During the year (specific date)

● Journal Entry:

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Debit: Merchandise Inventory $18,000
Credit: Cash $18,000

4. Merchandise Returned to Suppliers:

● Date: During the year (specific date)

● Journal Entry:

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Debit: Accounts Payable $25,000
Credit: Merchandise Inventory $25,000

5. Payment for Purchases (Within Discount Period):

● Date: During the year (specific date)

● Journal Entry:

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 Debit: Accounts Payable $675,000 (700,000 -
25,000 return)
Credit: Cash $668,250 (675,000 -
1% discount)
Credit: Purchase Discounts $6,750 (1% of
$675,000)

6. Sales on Account:

● Date: During the year (specific date)

● Journal Entry:

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Debit: Accounts Receivable $900,000
Credit: Sales Revenue $900,000

7. Cost of Goods Sold (COGS):

● Date: During the year (specific date)

● Journal Entry:

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Debit: Cost of Goods Sold $600,000
Credit: Merchandise Inventory $600,000

8. End of Year Inventory:

● Date: December 31, 2022

● Journal Entry:
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Debit: Merchandise Inventory $200,000
Credit: Cost of Goods Sold $200,000

Periodic Inventory System (Gross Method)

In the periodic inventory system, the inventory is updated at the end of the period,
rather than after each transaction.

Journal Entries for Periodic Inventory System (Gross Method):

1. Beginning Inventory:

● Date: January 1, 2022

● Journal Entry:

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Debit: Merchandise Inventory $150,000
Credit: Retained Earnings (or Opening Bal) $150,000

2. Purchases of Merchandise on Account:

● Date: During the year (specific date)

● Journal Entry:

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Debit: Purchases $700,000
Credit: Accounts Payable $700,000
3. Freight Charges Paid:

● Date: During the year (specific date)

● Journal Entry:

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Debit: Freight-In $18,000
Credit: Cash $18,000

4. Merchandise Returned to Suppliers:

● Date: During the year (specific date)

● Journal Entry:

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Debit: Accounts Payable $25,000
Credit: Purchases $25,000

5. Payment for Purchases (Within Discount Period):

● Date: During the year (specific date)

● Journal Entry:

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Debit: Accounts Payable $675,000 (700,000 -
25,000 return)
Credit: Cash $668,250 (675,000 -
1% discount)
Credit: Purchase Discounts $6,750 (1% of
$675,000)
6. Sales on Account:

● Date: During the year (specific date)

● Journal Entry:

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Debit: Accounts Receivable $900,000
Credit: Sales Revenue $900,000

7. End of Year Inventory (Periodic System Update):

At the end of the year, a physical count is taken to determine the ending inventory. This
inventory is then recorded, and the COGS is adjusted based on the period's
transactions.

● Date: December 31, 2022

● Journal Entry:

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Debit: Merchandise Inventory $200,000
Credit: Income Summary $200,000

At the end of the period, the Purchases, Freight-In, and Purchase Returns will be used
to calculate the ending inventory.

Advantages of the Perpetual System Over the Periodic System:

1. Real-Time Inventory Tracking: The perpetual system continuously updates

inventory and COGS with every sale or purchase, providing up-to-date information
at all times. This helps in making better, timely decisions about purchasing,
sales, and stock levels.
 2. Improved Control and Accuracy: Since inventory is updated in real-time,
discrepancies due to errors, theft, or losses can be spotted more quickly, which
allows for more effective control over inventory levels and reduces the risk of
stockouts or overstocking.

Question 1:
You are the CFO of Brighton Co. The following details are available in respect of
inventory purchases and sales during 2025:
Beginning Inventory (Jan 1, 2025):
● 10,000 units at $6.00/unit
Purchases:
● Jan 20: 3,000 units at $6.50/unit
● Mar 25: 7,000 units at $7.00/unit
● Oct 10: 5,000 units at $7.50/unit
Sales:
● Jan 15: 5,000 units at $9.00/unit
● Apr 20: 4,000 units at $9.00/unit
● Nov 25: 6,000 units at $9.00/unit
Requirement:
Using the perpetual system, determine Gross Profit, Cost of Goods Sold (COGS), and
Ending Inventory (EI) under the following inventory costing methods:
1. Average Cost
2. FIFO
3. LIFO

Question 2:
You are the CFO of Oceanview Co. The following details are available in respect of
inventory purchases and sales during 2026:
Beginning Inventory (Jan 1, 2026):
● 12,000 units at $5.00/unit
Purchases:
● Jan 18: 4,000 units at $5.50/unit
● Mar 30: 8,000 units at $6.00/unit
● Oct 20: 7,000 units at $6.50/unit
Sales:
● Jan 12: 6,000 units at $8.00/unit
 ● Apr 25: 5,000 units at $8.00/unit
● Nov 30: 7,000 units at $8.00/unit
Requirement:
Using the perpetual system, determine Gross Profit, Cost of Goods Sold (COGS), and
Ending Inventory (EI) under the following inventory costing methods:
1. Average Cost
2. FIFO
3. LIFO