Question

Great Adventures Problem AP6-1

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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 2022. All watches are sold for $493 each.

Jul.		17		Purchased 43 watches for $6,149 ($143 per watch) on account.
Jul.		31		Sold 33 watches for $16,269 cash.
Aug.		12		Purchased 33 watches for $5,049 ($153 per watch) cash.
Aug.		22		Sold 23 watches for $11,339 on account.
Sep.		19		Paid for watches purchased on July 17.
Sep.		27		Receive cash of $19,200 for watches sold on account on August 22.
Oct.		27		Purchased 73 watches for $11,899 ($163 per watch) cash.
Nov.		20		Sold 83 watches for $40,919 cash.
Dec.		4		Purchased 106 watches for $18,338 ($173 per watch) on account.
Dec.		8		Sold 33 watches for $16,269 on account.

Required:

1-a. Calculate sales revenue, cost of goods sold, and ending inventory as of December 31, 2022, 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 $93 per watch.

a. Record any necessary adjustment on December 31, 2022, 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, 2022, balance sheet?

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

Answer 1

Part 1-a)

The sales revenue, cost of goods sold and ending inventory is calculated as below:

Sales Revenue = Total Number of Units Sold during the Period*Sales Price Per Unit = (33 + 23 + 83 + 33)*493 = 172*493 = $84,796

____

Cost of Goods Sold = Cost of July 17 Purchase + Cost of August 12 Purchase + Cost of October 27 Purchase + Cost of Balance Units Sold from December 4 Purchase = 43*143 + 33*153 + 73*163 + (172 - 43 - 33 - 73)*173 = $27,076

____

Ending Inventory = Total Units in Ending Inventory*Unit Price based on FIFO Method = (33)*173 = $14,359

_______

Part 1-b)

The gross profit section of the partial income statement is prepared as below:

Great Adventures, Inc.
Partial Income Statement
For the Year Ended December 31, 2022
Sales Revenue	84,796
Less Cost of Goods Sold	27,076
Gross Profit	$57,720

_______

Part 2-a)

The value of inventory will be written off with the difference between the cost of remaining 83 units (which is $173 per watch) and the net realizable value (which is $93 per watch).

The adjustment is recorded as below:

Date	Account Titles	Debit	Credit
31-Dec-22	Cost of Goods Sold [83*(173-93)]	$6,640
	Inventory		$6,640

______

Part 2-b)

The inventory will be recorded at the lower of cost or net realizable value. The value of MU inventory to be reported in the December 31, 2022, balance sheet is given as below:

MU Inventory to be Reported in the December 31, 2022 Balance Sheet = Ending Inventory in Units*Net Realizable Value = 83*93 = $7,719

______

Part 2-c)

The revised cost of goods sold will include the value of write down of inventory (which is $6,640). This will reduce the amount of gross profit. The updated partial income statement is provided as follows:

Great Adventures, Inc.
Partial Income Statement
For the Year Ended December 31, 2022
Sales Revenue	84,796
Less Cost of Goods Sold (27,076+6,640)	33,716
Gross Profit	$51,080