Question

At the beginning of Year 2, the Redd Company had the following balances in its accounts:

Cash	$	7,900
Inventory		1,900
Common stock		7,400
Retained earnings		2,400

a. Identify these events as asset source (AS), asset use (AU), asset exchange (AE), or claims exchange (CE).(Select "NA" if there is no effect on the "Classification".)

During Year 2, the company experienced the following events:

1. Purchased inventory that cost $5,400 on account from Ross Company under terms 2/10, n/30. The merchandise was delivered FOB shipping point. Freight costs of $490 were paid in cash.

2. Returned $450 of the inventory it had purchased because the inventory was damaged in transit. The seller agreed to pay the return freight cost.

3. Paid the amount due on its account payable to Ross Company within the cash discount period.

4. Sold inventory that had cost $5,900 for $8,900 on account, under terms 2/10, n/45.

5. Received merchandise returned from a customer. The merchandise originally cost $490 and was sold to the customer for $790 cash. The customer was paid $790 cash for the returned merchandise.

6. Delivered goods FOB destination in Event 4. Freight costs of $590 were paid in cash.

7. Collected the amount due on the account receivable within the discount period.

8. Took a physical count indicating that $1,600 of inventory was on hand at the end of the accounting period.

   
   

   Event		Classification
   1a.	(Purchase inventory).
   1b.	(Shipping cost).
   2.
   3.
   4a.	(Recording revenue).
   4b.	(Recording cost of goods sold).
   5a.	(Reversing revenue).
   4b.	(Reversing cost of goods sold).
   6.
   7.
   8

Answer 1

Event		Classification
1a.	(Purchase inventory).	AS	Since asset is the same in this case
1b.	(Shipping cost).	AE	Asset is exchanged for expense
2		AU	Asset used as inventory returned
3		AU	Asset used as cash paid
4a.	(Recording revenue).	AS	Recording of revenue will create asset
4b.	(Recording cost of goods sold).	AU	Inventory used
5a.	(Reversing revenue).	AU	Sales Return will use asset
4b.	(Reversing cost of goods sold).	AS	Inventory will come back to stock
6		AU	Cash paid
7		AU	Receivable will be down
8		AU