Question

The following list summarizes the transactions that took place during a start up's second year of operations. Using the information below (and assuming FIFO for inventory), how would I create a list of the appropriate journal entries? (There were 150 units of inventory, which had been purchased at $10 per unit, left at the end of Year One)

a. Ordered and received 200 units of inventory purchased on account for $11 each

b. Delivered 150 units of inventory to customer who ordered on account for $16 each

c. At the start of the year, purchased a small R&D business for $85, consisting of the following

items (fair value in parentheses):

-Land ($20)

-Patents ($50) w/ 10 years of useful life remaining

d. Spent $25 on research and development.

e. Ordered and received 100 units of inventory purchased on account for $13 each

f. A customer placed an order on account for 250 units at $17 each. 220 units were delivered.

Answer 1

List of appropriate journal entries is asked, Although the valuation of closing inventory is not asked by the question, Still I have done it.

FIFO method assumes that the inventory which is purchased first will be sold and the closing inventory on hand will be the purchases made at the last.

Calculation of closing inventory using FIFO:

S no.	Particulars	Quantity	Rate($)	Amount($)
1	Opening Inventory	150	10	1500
2	Purchases on account	200	11	2200
3	Purchases on account	100	13	1300
	Total	450		5000
4	Less Sales
	Sales on account	(150)	16	(2400)
	Sales on account	(220)	17	(3740)
	Total	(370)		(6140)
	Closing Inventory(450 -370)	80	13*	1040

* Closing Inventory is 80 units. The cost of inventory is taken as the cost of inventory purchased at the last i.e. out of 100 units purchased  at $ 13 each.

List of appropriate journal entries:

S no.	Particulars	Debit($)	Credit($)
1	Purchases A/c Dr	2200
	To Accounts Payable Cr		2200
	( Being 200 units purchased @ $11 each)
2	Accounts receivable Dr	2400
	To Sales Cr		2400
	( Being 150 units sold @ $16 each)
3	Land A/c Dr	20
	Patents A/c Dr	50
	Goodwill A/c Dr( Note-1)	15
	To Vendor A/c		85
	( Being business purchased)
4	Research and Development Expenses Dr	25
	To Cash Cr		25
	( Being expenditure on research and development made)
5	Purchases A/c Dr	1300
	To Accounts Payable Cr		1300
	( Being purchase of 100 units @ $13)
6	Accounts receivable Dr	3740
	To Sales Cr		3740
	( Being Sales made of 220 units @ $17)

Note-1

The standard on Business Combinations require the amount paid in excess of fair value to be recognized as Goodwill

Hence goodwill = $85- $70= $15