Question

Now that operations for outdoor clinics and TEAM events are running smoothly, Suzie thinks of another area for business expansion. She notices that a few clinic participants wear multiuse (MU) watches. Beyond the normal timekeeping features of most watches, MU watches are able to report temperature, altitude, and barometric pressure. MU watches are waterproof, so moisture from kayaking, rain, fishing, or even diving up to 100 feet won’t damage them. Suzie decides to have MU watches available for sale at the start of each clinic. The following transactions relate to purchases and sales of watches during the second half of 2019. All watches are sold for $304 each.

Jul. 17 Purchased 54 watches for $8,316 ($154 per watch) on account.
Jul. 31 Sold 44 watches for $13,376 cash.
Aug. 12 Purchased 44 watches for $7,216 ($164 per watch) cash.
Aug. 22 Sold 34 watches for $10,336 on account.
Sep. 19 Paid for watches ordered on July 17.
Sep. 27 Received full payment for watches sold on account on August 22.
Oct. 27 Purchased 84 watches for $14,616 ($174 per watch) cash.
Nov. 20 Sold 94 watches for $28,576 cash.
Dec. 4 Purchased 108 watches for $19,872 ($184 per watch) cash.
Dec. 8 Sold 44 watches for $13,376 on account.

1-a. Calculate sales revenue, cost of goods sold, and ending inventory as of December 31, 2019, assuming Suzie uses FIFO to account for inventory.

1-b. Prepare the gross profit section of a partial income statement for transactions related to MU watches.

2. Late in December, the next generation of multiuse (MU II) watches is released. In addition to all of the features of the MU watch, the MU II watches are equipped with a global positioning system (GPS) and have the ability to download and play songs and videos off the internet. The demand for the original MU watches is greatly reduced. As of December 31, the estimated net realizable value of MU watches is only $104 per watch.

a. Record any necessary adjustment on December 31, 2019, related to this information.(If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

b. For what amount would MU inventory be reported in the December 31, 2019, balance sheet?​

c. Prepare an updated gross profit section of a partial income statement accounting for this additional information.

Answer 1

Solution:-

1-a. Calculate sales revenue, cost of goods sold, and ending inventory as of December 31, 2019, assuming Suzie uses FIFO to account for inventory:-

Sales revenue	65,664
Cost of goods sold	36,404
Ending inventory	13,616

Explanation:-

Purchase
Date	Quantity	Rate per watch	Total
Jul. 17	54	154	8,316
Aug. 12	44	164	7,216
Oct. 27	84	174	14,616
Dec. 4	108	184	19,872
Total	290		50,020

Sales
Date	Quantity	Rate per watch	Total
Jul. 31	44	304	13,376
Aug. 22	34	304	10,336
Nov. 20	94	304	28,576
Dec. 8	44	304	13,376
Total	216		65,664

When using FIFO, first-in-first-out, the earliest units purchased are the first ones sold and the latest units purchased remain in ending inventory.
290 units - 216 units = 74 units remain in ending inventory.

Since the latest units purchased remain in ending inventory, the entire ending inventory is from the Dec. 4 purchase.

74 units x $184 = $13,616 Ending Inventory

Total Purchases - Ending Inventory = Cost of Goods Sold
50,020 - 13,616 = $36,404 Cost of Goods Sold

Sales Revenue - Cost of Goods Sold = Gross Profit
65,664 - 36,404 = $29,260 Gross Profit

1-b. Prepare the gross profit section of a partial income statement for transactions related to MU watches:-

Partial Income Statement
For the year ended December 31
Sales revenue	65,664
Cost of goods sold	(36,404)
Gross profit	29,260

2a. Record any necessary adjustment on December 31, 2019, related to this information:-

Date	Account titles and explanation	Debit	Credit
Dec. 31, 2019	Cost of goods sold	5,920
	Inventory		5,920

Explanation:-

Inventory Items	Cost Per unit	Market price per unit	Lower-of-cost-or-market per unit	Quantity	Total lower-of-cost-or-market
MU Watches	184	104	104	74	7,696

The amount of the inventory write-down equals the difference between the cost of the 74 MU watches ($13,616) and its market value ($7,696).

2b. For what amount would MU inventory be reported in the December 31, 2019, balance sheet:-

MU inventory be reported in the December 31, 2019, balance sheet

7,696

Explanation:-

Reports its inventory in the balance sheet at the lower-of-cost-or-market, which equals $7,696, as demonstrated in requirement 2(a).

2c. Prepare an updated gross profit section of a partial income statement accounting for this additional information:-

Partial Income Statement
For the year ended December 31
Sales revenue	65,664
Cost of goods sold	(42,324)
Gross profit	23,340

Explanation:-

Cost of goods sold includes the write-down of inventory of $5,920 calculated in requirement 2(a). This amount is added to the original cost of goods sold of $36,404. The additional cost of goods sold reduces gross profit by $5,920.