Question

Sanchez Company engaged in the following transactions during Year 1: 1) Started the business by issuing $13,700 of common stock for cash. 2) The company paid cash to purchase $8,200 of inventory. 3) The company sold inventory that cost $5,600 for $11,650 cash. 4) Operating expenses incurred and paid during the year, $5,100. Sanchez Company engaged in the following transactions during Year 2: 1) The company paid cash to purchase $12,000 of inventory. 2) The company sold inventory that cost $9,800 for $18,250 cash. 3) Operating expenses incurred and paid during the year, $6,100. Note: Sanchez uses the perpetual inventory system. What is the amount of inventory that will be shown on the balance sheet at December 31, Year 2?

Answer 1

1	Following are the journal entries in the books of Sanchez Company for year 1
							Inventory A/c
Sr No.	Particulars		Debit	Credit			Particulars	Dr.	Particulars	Cr
			$	$				$		$
1	Cash A/c	Dr	13,700.00				Cash A/c	8200	By Cost of Goods Sold A/c	5600
	Common Stock A/c	Cr		13,700.00					By Balance c/d	2600
	(Being cash received against common shares)
								8200		8200
2	Inventory A/c	Dr	8,200.00
	Cash A/c	Cr		8,200.00
	(Being cash paid for the purchase of Inventory)						In the Books of Sanchez Company
							Balance Sheet
3	Cash A/c	Dr	11,650.00				As at Year 1
	Sales A/c	Cr		11,650.00
	(Being inventory sold for cash)						Particulars			$
4	Cost of Inventory Sold A/c	Dr	5,600.00				Inventory			2600
	Inventory A/c	Cr		5,600.00
	(Being cost of inventory sold)
5	Operating Expenses A/c	Dr	5,100.00
	Cash A/c	Cr		5,100.00
	(Being operating expenses incurred and paid during the period)
2	Following are the journal entries in the books of Sanchez Company for year 2
							Inventory A/c
Sr No.	Particulars		Debit	Credit			Particulars	Dr.	Particulars	Cr
			$	$				$		$
1	Inventory A/c	Dr	12,000.00				By Balance b/d	2600	By Cost of Goods Sold A/c	9800
	Cash A/c	Cr		12,000.00			Cash A/c	12000	By Balance c/d	4800
	(Being cash paid for the purchase of Inventory)
								14600		14600
2	Cash A/c	Dr	18,250.00
	Sales A/c	Cr		18,250.00
	(Being inventory sold for cash)						In the Books of Sanchez Company
							Balance Sheet
3	Cost of Inventory Sold A/c	Dr	9,800.00				As at Year 2
	Inventory A/c	Cr		9,800.00
	(Being cost of inventory sold)						Particulars			$
4	Operating Expenses A/c	Dr	6,100.00				Inventory			4800
	Cash A/c	Cr		6,100.00
	(Being operating expenses incurred and paid during the period)
	Note: As operating expenses (like payroll, commission, selling expenses) are not related to production, they are not considered for the calculation of cost of goods sold.