Question

Ranns Supply uses a perpetual inventory system. On January 1, its inventory account had a beginning balance of $6,900,000. Ranns engaged in the following transactions during the year.

Purchased merchandise inventory for $9,700,000.

Generated net sales of $25,000,000.

Recorded inventory shrinkage of $10,000 after taking a physical inventory at year-end.

Reported gross profit for the year of $15,000,000 in its income statement.

a. At what amount was Cost of Goods Sold reported in the company's year-end income statement?

b. At what amount was Merchandise Inventory reported in the company's year-end balance sheet?

c. Immediately prior to recording inventory shrinkage at the end of the year, what was the balance of the Cost of Goods Sold account? What was the balance of the Merchandise Inventory account?

Answer 1

• All working forms part of the answer
• Requirement ‘a’

A	Net Sales	$    25,000,000.00
B	Gross Profits	$    15,000,000.00
C = A - B	Cost of Goods Sold reported	$    10,000,000.00

• Requirement ‘b’

A	Beginning Inventory Balance	$      6,900,000.00
B	Inventory purchased	$      9,700,000.00
C	Cost of Goods Sold reported	$    10,000,000.00
D = A+ B - C	Merchandise Inventory reported in Income Statement	$      6,600,000.00

• Requirement ‘c’

Working		Cost of Goods Sold account	Merchandise Inventory Account
A	Balance reported on Income Statement	$    10,000,000.00	$     6,600,000.00
B	Effect of Shrinkage of Inventory	$       (100,000.00)	$           10,000.00
C = A+ B	Balance prior to recording Inventory Shrinkage	$      9,900,000.00	$     6,610,000.00