Question

In a cost saving effort, OMI Computers Ltd. manufactured its own hard drives to go into its laptop computer production rather than purchasing them from an outside supplier. The Company charged its inventory account for the price it would have paid the outside supplier. The difference between the supplier price and its own cost was recorded as a gain. OMI recorded the following journal entry:

            Inventory                     $120,000

                  Cash                                             $100,000

                  Gain on Purchase                             20,000

Required:

1. Identify and briefly explain (in a sentence or two) what accounting principle(s) is/are involved. (Do not use faithful representation)   

Answer 1

Answer :-

When a company thinks for a producing it's new products if that product is going to be highly demanded in markets then first they follows the strategies for such products.

When a company manufactures it's own products.For highly profit, they would apply the price-skimming strategy in introduction stage as accounting principles because price - skimming is strategy for new products introduced in markets.

Like this, When OMI Computers Ltd. manufactures the new product as hard drives then they use the pricing- skimming in introduction stage as the accounting principle because it helps in introduce new product . The company analyze the suppliers cost into this step of cost of new product for high profits from it's own new products.

So the OMI Computers Ltd. thinks if they purchased the inventory from suppliers so the entry could be debit the inventory account as purchase of $100,000 and credit the cash account for $100,000.

then if the new product launches in market for their company profits so they increase the cost of their own product and compared the cost of both company's products. so they increase the cost by $20,000 for profit as pricing skimming as accounting principles of new products so they recorded the journal entry : Debit the inventory account for $120,000 and Credit the cash account for $100,000 and gain on purchase (as profit ) for $20,000 .

I hope this helps you.