Question

Neverstop Corporation sells item A as part of its product line. Information about the beginning inventory, purchases, and sales of item A are given in the following table for the first six months of the current year. The company uses a perpetual inventory system:

	Purchases							Sales
Date	Number of Units			Unit Cost				Number of Units			Sales Price
January 1 (beginning inventory)		580		$	4.10
January 24									380		$	5.60
February 8		680		$	4.20
March 16									380		$	5.60
June 11		680		$	4.20

4. Prepare journal entries to record the purchase and sale transactions, as well as the cost of sales, assuming that all sales and purchase transactions are on account and that the weighted-average method is used. (Do not round intermediate calculations and round the final answers to 2 decimal places. If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Transaction list:

• 1

  Record sales on account.

• 2

  Record cost of sales on goods sold on account.

• 3

  Record purchase of goods on account.

• 4

  Record sales on account.

• 5

  Record cost of sales on goods sold on account.

• 6

  Record purchase of goods on account

• Assume that because of a clerical error, the ending inventory is reported to be 1,080 units rather than the actual number of units (1,180) on hand.

• 
  5a. If FIFO is used, calculate the amount of the understatement or overstatement in the cost of sales for the first six months of the current year.

• 
  
  5b. If FIFO is used, calculate the amount of the understatement or overstatement in the current assets at June 30 of the current year.

• ANSWER 4, 5a, 5b

Answer 1

	Weighted Average	Purchases			Cost of Goods Sold			Inventory on hand
Date	Activity	Units	Unit Price	Amount	Units	Unit Price	Amount	Units	Unit Price	Amount
Jan. 1	Beginning Inventory							580	$             4.10	$           2,378.00
Jan. 24	Sales				380	$            4.10	$       1,558.00	200	$             4.10	$              820.00
Feb.8	Purchase	680	$                 4.20	$        2,856.00				880	$             4.18	$           3,676.00
Mar. 16	Sales				380	$            4.18	$       1,588.40	500	$             4.18	$           2,087.60
Jun. 11	Purchase	680	$                 4.20	$        2,856.00				1180	$             4.19	$           4,943.60
	Total	1360		$       5,712.00	380		$       3,146.40	1180		$          4,943.60

4.

Date	Account Titles	Debit	Credit
Jan. 24	Accounts Receivable	$           2,128.00
	Sales Revenue		$            2,128.00
	Cost of Goods Sold	$           1,558.00
	Inventory		$            1,558.00
Feb. 8	Inventory	$           2,856.00
	Accounts Payable		$            2,856.00
Mar. 16	Accounts Receivable	$           2,128.00
	Sales Revenue		$            2,128.00
	Cost of Goods Sold	$           1,588.40
	Inventory		$            1,588.40
Jun. 11	Inventory	$           2,856.00
	Accounts Payable		$            2,856.00

5a.
Incorrect Inventory = 1080 x $4.20 = $4536
Correct Inventory = 1180 x $4.20 = $4956

Cost of Goods Sold Overstated by $420 i.e. $4956-4536

5b.
Inventory (Current Assets) is understated by $420