Question

Big Oak Lumber is a lumber yard on Angel Island. Some of Big Oak’s transactions during the- current year are as follows:

Apr. 15 Sold lumber on account to Hard Hat Construction, $19,700. The inventory subsidiary ledger shows the cost of this merchandise was $10,300.

Apr. 19 Purchased lumber on account from LHP Company, $3,700.

May 10 Collected in cash the $19,700

account receivable from Hard Hat Construction.

May 19 Paid the $3,700 owed to LHP Company.

Dec. 31 Big Oak’s personnel counted the inventory on hand and determined its cost to be $114,000. The accounting records, however, indicate inventory of $116,500 and a cost of goods sold of $721,000. The physical count of the inventory was observed by the company’s auditors and is considered correct.

Instructions:

a.) Prepare journal entries to record these transactions and events in the accounting records of Big Oak Lumber. (The company uses a perpetual inventory system.)

b.) Prepare a partial income statement showing the company’s gross profit for the year. (Net sales for the year amount to $1,422,000.)

c.) Big Oak purchases merchandise inventory at the same wholesale prices as other lumber yards. Because of its remote location the company must pay between $8,000 and $18,000 per year in extra transportation charges to receive delivery of merchandise. (These additional charges are included in the amount shown as cost of goods sold.)

Assume that an index of key business ratios in your library shows lumber yards of Big Oak’s approximate size (in total assets) average net sales of $1 million per year and a gross profit rate of 22 percent.

Is Big Oak able to pass its extra transportation costs on to its customers? Does the business appear to suffer or benefit financially from its remote location? Explain your reasoning and support your conclusions with specific accounting data comparing the operations of Big Oak Lumber with the industry averages.

Answer 1

Answer to (a): The journal entry shall be as under.

Answer to (b) : Preparation of partial income statement based on above mentioned journal entries shall be as under.

The Gross Profit for the year shall be $ 1,30,000.