Question

Kingston Company starts the business in Year 1. Kingston uses FIFO as their inventory costing method. They purchase inventory as follows:

8/5/Year1: 1000 units at $30 each
11/6/Year1: 3000 units at $36 each

Assume Kingston signs a sales contract for 3,800 units for $380,000 ($100 each) on 11/1/Year1. This is the only sale for the year. The customer is within a 30-mile delivery radius (Goods are delivered by a van.)

1. Assume the items are delivered on 11/15/Year1. The customer pays in full on 11/15. What will Kingston report as the cost of goods sold for Year1? _______

2. Assume the facts in part 1. The estimated selling price of the units is $102 each as of 12/31/Year1. At what dollar amount will Kingston report the inventory on the 12/31/Year1 balance sheet? _______

3. Assume the items are delivered on 11/15/Year1. The customer paid Kingston $380,000 as follow:
---20,000 advance payment on 11/10/Year1
---180,000 payment on 12/20/Year1
---180,000 payment on 1/5/Year2
How much sales revenue (not gross margin) does Kingston report in Year1? _________

4. Assume the items are delivered on 1/5/Year2. The customer paid Kingston $380,000 as follow:
---20,000 advance payment on 11/10/Year1
---180,000 payment on 12/20/Year1
---180,000 payment on 1/5/Year2
How much sales revenue (not gross margin) does Kingston report in Year1? _____________

Answer 1

This problem is solved based on realisation Concept under Accounting Principles. According to this concept, revenue is considered as being earned on the date at which it is realised,i.e. on the date when the goods passes to the buyer & he becomes legally liable to pay.

Answer for 1:

Property are delivered on 11/15/year 1. So, the cost of goods sold is calculated as follows.

8/5/year 1 - Purchased            = (1,000*30) =30,000

11/6/year 1 - purchased           = (3,000*36)   =108,000

11/15/year 1-delivered            = (3,800 units) =(1,000*30+2,800*36)

Cost of goods sold is =30,000+ 100,800       =130,800

Answer for 2:

In this problem selling price per unit is not at all required to calculateinventory balance on 31/12 year 1. As per above 200 units at $ 36 per unit is Closing inventory, i.e. 200*36 = $ 7,200.

Answer for 3:

As per realisation concept under Accounting Principles, the date when the goods are delivered is consider as sales revenue earned date. So sales as on 12/31 year 1 is $ 3,88 units at $ 100 per unit = $380,000 only.

Answer for 4:

Under this situation items are delivered on 1/5/ year 2. So, revenue was not earned before 12/31 year 1. Therefore year 1 sales is nil