Question

Pam’s Creations had the following sales and purchase transactions during Year 2. Beginning inventory consisted of 280 items at $96 each. The company uses the FIFO cost flow assumption and keeps perpetual inventory records.

  

Date	Transaction	Description
Mar. 5	Purchased	260 items @	$	106
Apr. 10	Sold	150 items @	$	207
June 19	Sold	275 items @	$	207
Sept. 16	Purchased	210 items @	$	111
Nov. 28	Sold	140 items @	$	212

Required
a. Record the inventory transactions in general journal format.

b. Calculate the gross margin Pam’s Creations would report on the Year 2 income statement.

c. Determine the ending inventory balance Pam’s Creations would report on the December 31, Year 2, balance sheet.

Answer 1

Solution a:

Computation of ending inventory COGS under FIFO
Date	Beginning Inventory			Purchase			Cost of Goods Sold			Ending Inventory
	Qty	Rate	Amount	Qty	Rate	Amount	Qty	Rate	Amount	Qty	Rate	Amount
1-Mar	280	$96.00	$26,880.00	0	$0.00	$0.00	0	$0.00	$0.00	280	$96.00	$26,880.00
5-Mar	280	$96.00	$26,880.00	260	$106.00	$27,560.00	0	$0.00	$0.00	280	$96.00	$26,880.00
										260	$106.00	$27,560.00
10-Apr	280	$96.00	$26,880.00	0	$0.00	$0.00	150	$96.00	$14,400.00	130	$96.00	$12,480.00
	260	$106.00	$27,560.00							260	$106.00	$27,560.00
19-Jun	130	$96.00	$12,480.00	0	$0.00	$0.00	130	$96.00	$12,480.00	115	$106.00	$12,190.00
	260	$106.00	$27,560.00				145	$106.00	$15,370.00
16-Sep	115	$106.00	$12,190.00	210	$111.00	$23,310.00	0	$0.00	$0.00	115	$106.00	$12,190.00
										210	$111.00	$23,310.00
28-Nov	115	$106.00	$12,190.00	0	$0.00	$0.00	115	$106.00	$12,190.00	185	$111.00	$20,535.00
	210	$111.00	$23,310.00				25	$111.00	$2,775.00
Total							565		$57,215.00	185		$20,535.00

Journal Entries - Pam's Creations
Date	Particulars	Debit	Credit
5-Mar	Inventory Dr	$27,560.00
	To Accounts Payable		$27,560.00
	(To record purchase of inventory)
10-Apr	Accounts receivables Dr	$31,050.00
	To Sales Revenue		$31,050.00
	(To record sales revenue)
10-Apr	Cost of goods sold Dr	$14,400.00
	To Inventory		$14,400.00
	(To record COGS)
19-Jun	Accounts receivables Dr	$56,925.00
	To Sales Revenue		$56,925.00
	(To record sales revenue)
19-Jun	Cost of goods sold Dr	$27,850.00
	To Inventory		$27,850.00
	(To record COGS)
16-Sep	Inventory Dr	$23,310.00
	To Accounts Payable		$23,310.00
	(To record purchase of inventory)
28-Nov	Accounts receivables Dr	$29,680.00
	To Sales Revenue		$29,680.00
	(To record sales revenue)
28-Nov	Cost of goods sold Dr	$14,965.00
	To Inventory		$14,965.00
	(To record COGS)

Solution b:

Gross Margin = Sales revenue - COGS = ($31,050 + $56,925 + $29,680) - $57,215 = $60,440

Solution c:

Ending inventory balance Pam’s Creations would report on the December 31, Year 2, balance sheet = $20,535