Question

Esperado Furnishings are retailers who purchase and sell household furnishings, including table
lamps. The business uses a perpetual inventory system and adjusts cost of goods sold for any
shortage or excess inventory. The business began the last quarter of 2018 with merchandise
inventory of 10 pairs of “Italia” table lamps at a total cost of $168,200.
The following transactions, relating to the “Italia” brand were completed during the quarter:
October 5 Purchased 15 pairs of lamps at a cost of $17,020 per pair.
October 14 Sold 18 pairs of lamps to Muller Furnishings at $22,250 per pair
October 22 Purchased 24 pairs at a cost of $18,175 per pair but the supplier gave a 4% quantity
discount.
November 10 Sold 15 pairs of lamps to Orion Household Ltd and 10 pairs to Brown’s Furnishings
which yielded total sales revenue of $589,750.
November 12 Owing to an increased demand for this product, 30 pairs of lamps were purchased
on account at a cost of $17,612 per pair. In addition, Esperado paid $288 in
cash on each pair of lamps to have the inventory shipped from the vendor’s
warehouse to Esperado’s showroom.
November 27 Sold 23 pairs of lamps to Middletown Company at a price of $25,080 per pair.
November 30 An actual count of inventory was carried out which revealed that there were 15
pairs of the “Italia” brand in the warehouse.
December 2 In preparation for the festive season, Esperado purchased 25 pairs of lamps at a
total cost of $474,500.
December 15 5 pairs of the lamps purchased on December 2 were returned to the supplier, as
they were not of the brand ordered.
December 30 Sold 22 pairs of lamps to two customers (Omega Traders & Middleton
Furnishings) at a selling price of $26,550 per pair.
All purchases were on account and received on the dates stated.
Required:
i) Prepare a perpetual inventory record for Esperado Furnishings, using the first in, first
out (FIFO) method to determine the value of ending inventory at December 31, 2018, and the
total amount to be assigned to cost of goods sold for the period.
ii) Given that selling, distribution and administrative costs for the quarter were $23,445, $10,250
and$75,435 respectively, prepare an income statement for Esperado Furnishings for the
period, to determine the net profit for the quarter, assuming the perpetual inventory
system.
iii) You are told that 8 pairs of lamps sold on November 27, 2018 were on account. State the
journal entries necessary to record the transactions on November 12 and November 27,
assuming the business uses a: - Perpetual inventory system
- Periodic inventory system
iv) Assuming that Esperado sold 86 pairs of “Italia” brand of lamps during the quarter; determine
the value of ending inventory and cost of goods sold assuming the business used the periodic
system and the LIFO method?

Answer 1

a.
	Opening Stock			Inward			Outward			Closing Stock
Date	Qty	Rate	Amount	Qty	Rate	Amount	Qty	Rate	Amount	Qty	Rate	Amount
	10	16820	168200
5-Oct	10	16820	168200	15	17020	255300				10	16820	168200
										15	17020	255300
14-Oct	10	16820	168200				10	16820	168200	7	17020	119140
	15	17020	255300				8	17020	136160
22-Oct	7	17020	119140	24	17448	418752				7	17020	119140
										24	17448	418752
10-Nov	7	17020	119140				7	17020	119140	6	17448	104688
	24	17448	418752				18	17448	314064
12-Nov	6	17448	104688	30	17900	537000				6	17448	104688
										30	17900	537000
27-Nov	6	17448	104688				6	17448	104688	13	17900	232700
	30	17900	537000				17	17900	304300
2-Dec	13	17900	232700	25	18980	474500				13	17900	232700
										25	18980	474500
15-Dec	13	17900	232700				5	18980	94900	13	17900	232700
	25	18980	474500							20	18980	379600
30-Dec	13	17900	232700				13	17900	232700	11	18980	208780
	20	18980	379600				9	18980	170820

Value of inventory on 31 Dec 2018				208780
Cost of Good Sold				1550072
Opening Inventory		168200
Purchase		1685552
Less: Purchase Return		94900
Less: Closing Stock		208780
Cost of Good Sold		1550072

b.
Income Statement
Particular				Amount
Sales				2151190
Less: Cost of good sold				1550072
Less: Selling Expenses				23445
Less: Distribution				10250
Less: Administrative				75435
Profit				491988

c.
Journal Entries
a. 12 Nov
Perpetual inventory
	Purchase A/c Dr			537000
	To Vender				528360
	To Cash				8640
Periodic Inventory
	Purchase A/c Dr			528360
	To vender				528360
	Freight A.c Dr			8640
	To cash				8640
b. 27 Nov
	Middletown A/c Dr			576840
	To sales A/c				576840