Question

The following information is available for the Johan Corporation for 2017:

Beginning inventory	RM25,000
Merchandise purchase (on account)	155,000
Freight charges on purchases (paid in cash)	10,000
Merchandise returned to supplier (for credit)	12,000
Ending inventory	30,000
Sales (on account)	250,000
Cost of merchandise sold	148,000

Required:

Applying both perpetual and periodic inventory system, prepare journal entries for the above balances. Include all end of period adjusting entries, if any.

(Marks = 16)

Question 3

BumiHijau Corporation uses a periodic inventory system and has used the FIFO cost method since inception of the company in 1978. In 2017, the company decided to switch to the average cost method. Data for 2017 are as follows:

Beginning inventory, FIFO (5,000 units @ RM30)		RM150,000
Purchases:
5,000 units @ RM36 5,000 units @ RM40	RM180,000 200,000	380,000
Cost of goods available for sale		530,000
Sales for 2017 (8,000 units @ RM70)		560,000

Additional information:

a) The company’s effective income tax rate is 40% for all years.

b) If the company had used the average cost method prior 2017, ending inventory for 2016 would have been RM130,000.

c) 7,000 units remained in inventory at the end of 2017.

Required:

a) Ignoring income taxes, prepare the 2017 journal entry to adjust the accounts to reflect the average cost method.

b) What is the effect of the change in methods on 2017 net income?

Answer 1

Journal Entries Under
Perpetual Inventory system				Periodic Inventory System
	Debit	Credit			Debit	Credit
Merchandise Inventory	155000			Purchases	155000
Accounts payable		155000		Accounts payable		155000
(On a/c purchase of merchandise inventory)				(On a/c purchase of merchandise inventory)
Merchandise Inventory	10000			Freight-inward	10000
Cash		10000		Cash		10000
(Freight charges on purchases)				(Freight charges on purchases)
Accounts payable	12000			Accounts payable	12000
Merchandise Inventory		12000		Purchases returns		12000
(Merchandise returned)				(Merchandise returned)
Accounts Receivables	250000			Accounts Receivables	250000
Sales revenue		250000		Salesrevenue		250000
(On a/c sales)				(On a/c sales)
COGS	148000			Merchandise Inventory(Ending)	30000
Merchandise Inventory		148000		Purchases returns	12000
(Cost of the above merchandise sold)				COGS(Bal.figure)	148000
				Purchases		155000
				Freight-inward		10000
				Merchandise Inventory(Beginning))		25000
No such closing entry reqd.				(Closing Entry)
Inventory will reflect the givem amt. of 30000 when all entries are posted.

3.a. Journal entry:	Debit	Credit
Income statement --(Decrease due to change in inventory valuation from FIFO to AVCO)	20000
Inventory		20000
b. As value of beginning inventory decreased by 20000, COGS will be decreased by that amount & effect on 2017 Net income will be an INCREASE of 20000 in Net income.