Question

Stevens Ltd is the leading retailer of Gym equipment. The following information occurred during May 2020. Stevens Ltd had an opening inventory balance of $8,400,000.

May

1            Returned to the suppliers $80,000 of the opening inventory and received cash.

12          Purchased additional inventory on credit from the supplier for $12,000,000.

18          Sold inventory for $6,000,000 cash (Cost price to Stevens Ltd $2,400,000).

19          Paid the suppliers the account from 12 May.

31          The closing stocktake at year-end revealed an inventory balance of $17,800,000.

Required:

1. Record the above information for the month of May 2020 in the general journal using the perpetual inventory method. Narrations are not required. Ignore GST. [6 marks]

2. Record the above information for the month of May 2020 in the general journal using the physical inventory method. Narrations are not required. Ignore GST. Journal entries should include the four closing entries to determine the cost of goods sold and ending inventory. [8 marks]

3. Present the Income Statement extract for Stevens Ltd using the periodic inventory method for the month ended 31 May 2020. [3 marks]

4. Briefly explain two advantages of the perpetual inventory method for Stevens Ltd. [2 marks]

Answer 1

Requirement a:

Date	Account title and explanation	Debit	Credit
May 1	Accounts payable	$80,000
	Inventory		$80,000
	[To record purchase returns]
May 12	Inventory	$12,000,000
	Accounts payable		$12,000,000
	[To record credit purchases]
May 18	Cash	$6,000,000
	Sales revenue		$6,000,000
	[To record cash sales]
	Cost of goods sold	$2,400,000
	Inventory		$2,400,000
	[To record cost of goods sold]
May 19	Accounts payable	$12,000,000
	Cash		$12,000,000
	[To record cash paid to suppliers]

Requirement b:

Date	Account title and explanation	Debit	Credit
May 1	Purchase returns and allowance	$80,000
	Inventory		$80,000
	[To record purchase returns]
May 12	Purchases	$12,000,000
	Accounts payable		$12,000,000
	[To record credit purchases]
May 18	Cash	$6,000,000
	Sales revenue		$6,000,000
	[To record cash sales]
May 19	Accounts payable	$12,000,000
	Cash		$12,000,000
	[To record cash paid to suppliers]

Requirement c:

Income Statement
For the month ended May 31,2020
Sales revenue		$6,000,000
Cost of goods sold:
Inventory (beginning)	$8,400,000
Purchases	$12,000,000
Purchase returns	($80,000)
Inventory (Ending)	($17,800,000)
Cost of goods sold		$2,520,000
Gross profit		$3,480,000

Requirement d:

Advantages of perpetual:

i .It provides continuous information about the quantity of goods on hand

ii.It provides the cost of goods sold information without periodic inventory count