Question

Patricia’s Fabrics sells sewing machines and fabrics. On December 31, 2016, Patricia’s inventory amounted to $690,000. During the first week in January 2017 the company made only one purchase and one sale. These transactions were: Jan. 4 Purchased 20 sewing machines and 80 bolts of fabric from Consolidated Sewing. The total cost was $44,000, terms are 3/10, n/60. Jan. 7 Sold several sewing machines and a variety of fabrics on account to Vasquez Furniture Reupholsters. The total sales price was $29,000, terms are 2/10, 1/30, n/60. The total cost of the sewing machines and fabrics to Patricia’s was $14,500 (net of the purchase discount). Patricia’s records sales at the gross sales price and purchases at net cost and maintains subsidiary ledgers for accounts receivable, inventory and accounts payable. They use a periodic inventory system. Required: 1. Prepare journal entries to record these transactions, assuming that Patricia’s uses a perpetual inventory system. 2. What is the balance in the inventory account at the close of business on January 7th? 3. Prepare journal entries to record the two transactions. 4. What is the cost of goods sold for the first week of January? 5. What is the gross profit margin on the January 7th sale to Vasquez Furniture Reupholsters? 6. If Patricia’s pays their invoice on January 8th, how much will they pay? If Vasquez pays their invoice on January 14th, how much will they pay? Suggested presentation: please use Perpetual inventory system!

Answer 1

Ans 1) Journal Entries:(as Per Perpetual Inventory System)

a)On 4th Jan 2017, Purchase of 20 Sewing machine and 80fabric bolts.

Purchases A/c Dr. $44000

To Consolidated Sewing A/c $44000

(Note: $44000 if paid after 10days. Or if paid with in 10days, then purchase cost will be $44000-3% of 44000= $42680 and in above entry "Purchase Discount A/c" will be debited by $1320 )

b)On 7th Jan sold above goods.

Vasquez Furniture Reupholsters A/c Dr. $29000

To Sales $29000

(Note: $29000 if paid after 30days. Or if paid with in 10days, then discount on sales will be 2% of 29000= $580 or if paid after 10days but with 30days, then discount on sales will be 1% of 29000= $290 and in above entry "Discount on sales A/c" will be debited by $0/$580/$290 as applicable )

2)Assuming that patricia pays the purchase cost with 10days i.e she will enjoy discount benefit, then Balance in the inventory will be = Purchases+ Opennig Stock+Gross Profit- Sales = 42680+690000+( Sales $29000 - Cost of goods Sold $14500) - 29000 = $718180 (answer)

3)Same Journal entries as answered in 1 above.

4) Cost of Goods sold for 1st week of inventory= Opening Stock + Purchases - Closing Stock =690000+42680-718180 = $14500 (answer)

5) There was a gross profit = Sales - Cost of Goods Sold = $(29000 - 14500) = $14500.

Therefore Gross Profit Margin(%) = Gross Profit/ Sales*100 = 14500/29000*100 = 50%

6)If Patricia’s pays their invoice on January 8th, then they will pay $44000- 3% of $44000 = $42680.Hence enjoying purcahse discount of 3%.

And If Vasquez pays their invoice on January 14th i.e. on 10th day then also patricia will enjoy 3% discount and will liable to pay only $42680. But if paid on jan 15th or afterwards then she will have to pay full $44000 without discount benefit.