Question

Because Natalie has had such a successful first few months, she is considering other opportunities to develop her business. One opportunity is the sale of fine European mixers. The owner of Kzinski Supply Co. has approached Natalie to become the exclusive distributor of these fine mixers in her state. The current cost of a mixer is approximately $575, and Natalie would sell each one for $1,150. Natalie comes to you for advice on how to account for these mixers. Each appliance has a serial number and can be easily identified.

Natalie asks you the following questions.

1.		“Would you consider these mixers to be inventory or should they be classified as supplies or equipment?”
2.		“I’ve learned a little about keeping track of inventory using both the perpetual and the periodic systems of accounting for inventory.Which system do you think is better? Which one would you recommend for the type of inventory that I want to sell?”
3.		“How often do I need to count inventory if I maintain it using the perpetual system? Do I need to count inventory at all?”

The trial balance for cookie creations as on December 31, 2015 is as follows:

COOKIE CREATIONS Post-Closing Trial Balance December 31, 2015
Account		Debit		Credit
Cash		$1,180
Accounts Receivable		875
Supplies		350
Prepaid Insurance		1,210
Equipment		1,200
Accumulated Depreciation-Equipment				$40
Accounts Payable				75
Salaries and Wages Payable				56
Unearned Service Revenue				300
Interest Payable				15
Notes Payable				2,000
Common Stock				800
Retained Earnings				1,529
		$4,815		$4,815

In the end, Natalie decides to use the perpetual inventory system. The following transactions happen during the month of January.

Jan. 4		Bought five deluxe mixers on account from Kzinski Supply Co. for $2,875, FOB shipping point, terms n/30.
6		Paid $100 freight on the January 4 purchase.
7		Returned one of the mixers to Kzinski because it was damaged during shipping. Kzinski issues Cookie Creations credit for the cost of mixer plus $20 for the cost of freight that was paid on January 6 for one mixer.
8		Collected $375 of the accounts receivable from December 2015.
12		Three deluxe mixers are sold on account for $3,450, FOB destination, terms n/30. (Cost of goods sold is $595 per mixer.)
14		Paid the $75 of delivery charges for the three mixers that were sold on January 12.
14		Bought four deluxe mixers on account from Kzinski Supply Co. for $2,300, FOB shipping point, terms n/30.
17		Natalie is concerned that there is not enough cash available to pay for all of the mixers purchased. She invests an additional $1,000 cash in Cookie Creations in exchange for common stock.
18		Paid $80 freight on the January 14 purchase.
20		Sold two deluxe mixers for $2,300 cash. (Cost of goods sold is $595 per mixer.)
28		Natalie issued a check to her assistant for all the help the assistant has given her during the month. Her assistant worked 20 hours in January and is also paid the $56 owed at December 31, 2015. (Natalie’s assistant earns $8 an hour.)
28		Collected the amounts due from customers for the January 12 transaction.
30		Paid a $145 utility bill ($75 for the December 2018 accounts payable and $70 for the month of January).
31		Paid Kzinski all amounts due.
31		Cash dividends of $750 are paid.

Prepare a TRIAL BALANCE

Answer 1

Q.1 Answer -

Company should consider mixers as inventory as they are selling it as their course of business.

Q.2 Answer -

For the purpose if inventory valuation company needs to follow FIFO method to value inventory. Reason being is it is simple method to maintain. FIFO is cost effective method.

Q.3 Answer -

In perpetual Inventory system inventory counting can be done on every transaction for the purpose of maintaining high degree of accuracy and reduction of error.

1. Journal Entries -

2. Trial Balance -

3. Income Statement -

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