Question

Hoo Company sells TVs and it operates a periodic inventory system. On 1 January 2018, the inventory account in firms’ ledger had a balance of 1,200,000. Based on the following information, answer the required questions.

1. 1. Hoo’s accountants conducted a physical counting of inventory on 31 December 2018 and concluded that the value of all the inventories in Hoo’s warehouse was 1,000,000.

1. 2. On 1 May 2018, Hoo purchased more TVs from Kota Inc. at the cost of 600,000. Kota Inc. shipped out the TVs on 5 May 2018 on the terms of FOB shipping point. Hoo received those TVs on 20 May 2018. Hoo will not pay Kota Inc. until 1 January 2019.

1. 3. On 1 June, Hoo found out that some TVs purchased from Kota Inc. were in defect and returned those TVs. The total cost of those returned TVs was 160,000.

1. 4. On 28 December Hoo purchased more TVs from Dato Inc. at the cost of 200,000. Dato Inc. shipped out the TVs on 29 December 2018 on terms of FOB destination. Hoo received the TVs from Dato Inc. on 4 January 2019.

1. 5. One of Hoo’ major customers purchased 240,000 worth of TVs from Hoo, with cost 200,000, on 25 December 2018. Hoo shipped out the TVs on 27 December 2018, on terms of FOB destination. Those TVs arrived at the buyer’s place on 2 January 2019.

1. 6. Among the inventory in Hoo’s warehouse on 31 December 2018 was some TVs on consignment from Zaza Inc., with a cost of 100,000.

Required:

Hoo Inc. has not made any journal entries for all the above transactions yet. Assume that the above are all the transactions related to Hoo’s inventory for the 2018 accounting period.

• • For each of the above 6 transaction information, provide all relevant journal entries, if any, required on 31 December 2018. If no journal entry is needed, please indicate “No Entry” in your answer.

• • Calculate the ending inventory and the cost of goods sold for Hoo Inc.’s 2018 operation. Provide the journal entry for recognition of Hoo’ cost of goods sold.

Answer 1

All amounts are in $

Journal Entries

1) No entry is required

But based on this we will account cost of goods sold entry (shown at bottom)

2) On May 5, 2018

Purchases 600,000

Accounts Payable - Kota Inc 600,000

(Goods purchased on account entered in books on date of shipping)

3) On June 1, 2018

Accounts Payable - Kota Inc 160,000

Purchase Returns 160,000

(Goods worth 160,000 returned to Kota Inc)

4) Goods purchased from Dato Inc need not be entered in books for 2018 as they are shipped on terms as FOB destination. They are to be recognised in books upon reaching the destination i.e., in 2019.

5) The sale entry need not be accounted as sales is not fully completed as on the last date of 2018. The goods are shipped as FOB destination hence sale is completed only in reaching the destination point. The Sales Revenue is recognised in 2019 and those goods must form part of inventory in 2018 closing date.

6) There are goods worth of 100,000 lying in the warehouse which we hold as consignee for Zara (Consignor). These should not be reflected in our closing stock. No entries will be recorded for goods received on consignment.

Cost of goods sold

= Purchases - Purchase returns + Opening Inventory - Closing Inventory

= 600,000 - 160,000 + 1,200,000 - (1,000,000-100,000)

= 740,000

Journal Entry

A. If only one Inventory account is maintained in books

Cost of goods sold $740,000

Purchase returns $160,000

Purchases $600,000

Inventory (Stock) $300,000

(Cost of goods sold accounted)

B. If there are two accounts maintained for Inventory then the enty would have been

Inventory (Closing Stock) 900,000

Cost of goods sold 740,000

Purchase returns 160,000

Purchases 600,000

Inventory (Opening Stock) 1,200,000