Question

C8-3 Recording Daily and Adjusting Entries Using FIFO in a Perpetual Inventory System (Chapters 3, 4, 6, 7, and 8) (LO 3-3, 4-2, 4-3, 4-4, 6-3, 6-4, 6-5, 7-3, 8-2, 8-3) (General Ledger)

One Trick Pony (OTP) incorporated and began operations near the end of the year, resulting in the following post-closing balances at December 31:

Cash	$	18,620
Accounts Receivable		9,650
Allowance for Doubtful Accounts		900*
Inventory		2,800
Unearned Revenue (30 units)		4,350
Accounts Payable		1,300
Notes Payable (long-term)		15,000
Common Stock		5,000
Retained Earnings		4,520

  * credit balance.

The following information is relevant to the first month of operations in the following year:

	OTP will sell inventory at $145 per unit. OTP’s January 1 inventory balance consists of 35 units at a total cost of $2,800. OTP’s policy is to use the FIFO method, recorded using a perpetual inventory system.
	In December, OTP received a $4,350 payment for 30 units to be delivered in January; this obligation was recorded in Unearned Revenue. Rent of $1,300 was unpaid and recorded in Accounts Payable at December 31.
	OTP’s note payable matures in three years, and accrues interest at a 10% annual rate.

  

	January Transactions
1.	Included in OTP’s January 1 Accounts Receivable balance is a $1,500 balance due from Jeff Letrotski. Jeff is having cash flow problems and cannot pay the $1,500 balance at this time. On 01/01, OTP arranges with Jeff to convert the $1,500 balance to a 6-month note, at 12% annual interest. Jeff signs the promissory note, which indicates the principal and all interest will be due and payable to OTP on July 1 of this year.
2.	OTP paid a $500 insurance premium on 01/02, covering the month of January; the payment is recorded directly as an expense.
3.	OTP purchased an additional 150 units of inventory from a supplier on account on 01/05 at a total cost of $9,000, with terms 2/15, n/30.
4.	OTP paid a courier $300 cash on 01/05 for same-day delivery of the 150 units of inventory.
5.	The 30 units that OTP’s customer paid for in advance in December are delivered to the customer on 01/06.
6.	On 01/07, OTP paid the amount necessary to settle the balance owed to the supplier for the 1/05 purchase of inventory (in 3).
7.	Sales of 40 units of inventory occuring during the period of 01/07 – 01/10 are recorded on 01/10. The sales terms are 2/10, n/30.
8.	Collected payments on 01/14 from sales to customers recorded on 01/10. The discount was properly taken by customers on $5,800 of these credit sales; consequently, OTP received less than $5,800.
9.	OTP paid the first 2 weeks wages to the employees on 01/16. The total paid is $2,200.
10.	Wrote off a $1,000 customer’s account balance on 01/18. OTP uses the allowance method, not the direct write-off method.
11.	Paid $2,600 on 01/19 for December and January rent. See the earlier bullets regarding the December portion. The January portion will expire soon, so it is charged directly to expense.
12.	OTP recovered $400 cash on 01/26 from the customer whose account had previously been written off on 01/18.
13.	An unrecorded $400 utility bill for January arrived on 01/27. It is due on 02/15 and will be paid then.
14.	Sales of 65 units of inventory during the period of 01/10 – 01/28, with terms 2/10, n/30, are recorded on 01/28.
15.	Of the sales recorded on 1/28, 15 units are returned to OTP on 01/30. The inventory is not damaged and can be resold.
16.	On 01/31, OTP records the $2,200 employee salary that is owed but will be paid February 1.
17.	OTP uses the aging method to estimate and adjust for uncollectible accounts on 01/31. All of OTP’s accounts receivable fall into a single aging category, for which 8% is estimated to be uncollectible. (Update the balances of both relevant accounts prior to determining the appropriate adjustment, and round your calculation to the nearest dollar.)
18.	Accrue interest for January on the note payable on 01/31.
19.	Accrue interest for January on Jeff Letrotski’s note on 01/31 (see 1) Requirement General Journal tab - Prepare all January journal entries and adjusting entries for items 1–19. Review the 'General Ledger' and the adjusted 'Trial Balance' Tabs to see the effect of the transactions on the account balances. Trial Balance tab - Review the adjusted 'Trial Balance' as of January 31. Income Statement tab - Prepare an income statement for the period ended January 31 in the 'Income Statement' Tab. Statement of Retained earnings - Prepare a statement of retained earning in the 'Statement of Retained earnings' Tab. Balance Sheet tab - Prepare a classified balance sheet as of January 31 in the 'Balance Sheet' Tab. Analysis tab -  Using the information from the requirements above, complete the 'Analysis' tab.

Answer 1

Date	Particulars	Debit	Credit
1-Jan	Biils Receivable	1500
	Accounts Receivable		1500
	Amount due from Jeff converted to Promissory note
2-Jan	Insurance expense	500
	Cash		500
	Insurance expense recorded for year
5-Jan	Inventory	9000
	Accounts Payable		9000
	Inventory purchased on account
5-Jan	Inventory	300
	Cash
	Courier expense on unit purchased
6-Jan	Unearned revenue	4350
	Sales		4350
	Sale recorded and unearned revenue transferred to income account
6-Jan	Cost of goods sold	2400
	Inventory		2400
	Proportionate cost from opening inventory on 30 units transferred to cost of goods sold
	FIFO method of inventory is followed
7-Jan	Accounts payable	9000
	Inventory		180
	Cash		8820
	Since payment is made within 15 days we will avail a discount of 2 % on amount to be paid = 9000 x 2% , = 180
	Under perpetual accounting any discount will reduce cost of inventory
10-Jan	Acccounts recceivable	5800
	Sales		5800
	Sale recorded
10-Jan	Cost of goods sold	2528
	Inventory		2528
	Cost is calculated as
	5 units X 80 , =400 ( from opening stock)
	Cost of 150 units purchased = 9000 +300 -180 , = 9120
	proportionate cost of 35 units sold
	= (9120 / 150) x 35
	2128
	Total cost of goods sold = 400 +2128 , = 2528
14-Jan	Cash	5684
	sales Discount	116
	Accounts Receivable		5800
	Discount allowed on early payment
	= 5800 x 2% , = 116
16-Jan	Work in process	2200
	Cash		22200
	Wage expense recorded in work in process
18-Jan	Allowance for doubtful account	1000
	Accounts receivables		1000
	Amount written off to allowance account
19-Jan	Rent Expense	1300
	Accounts payable	1300
	Cash		2600
	Rent expense recorded and outstanding rent for december paid
26-Jan	Accounts receivable	400
	Allowance for doubtful account		400
26-Jan	Cash	400
	Accounts receivables		400
	Accouts receivable re instated and amount recovered from customer
27-Jan	Utility Expense	400
	Accounts Payable		400
	Since amount relate to January so recorded in January
28-Jan	Accounts receivables	9425
	Sales		9425
28-Jan	Cost of Goods Sold	3952
	Inventory		3952
	Proportionate cost of 65 units sold
	= (9120 / 150) x 65
	3952
30-Jan	sales	2175
	Accounts receivables		2175
	Sale price of 15 units
	= 15 x 145 , 2175
30-Jan	Inventory	912
	Cost of Goods Sold		912
	Proportionate cost of 15 units
	= (9120 / 150) x 15 , =912
31-Jan	Employee Salary expense	2200
	Acccounts payable		2200
	Employee salary expense recorded
31-Jan	Allowance for doubtful account	852
	Accounts receivable		852
	Adjusted balance of accounts receivables =			Details for Allowance for doubtful account
	opening balance	9650		Closing balance required			1152
	Add: on Account Sales of month	15225		=14400*8%
	= 5800 +9425			Add: Net allowance			600
	Add: Allowance re instated	400		(1000-400)
	Sub total	25275		Less Opening Balance			900
	Less: Jeff balance	1500
	Less : sale return	2175		Provision to be created			852
	Cash received on sale	5684
	Discount on sale	116
	Less: Allowance	1000
	Less Cash received	400
	Net Balance	14400
31-Jan	Interest Expense	125
	Accounts payable		125
	Interest payable yearly = 15000 x 10 %, 1500
	Monthly interest due= 1500 / 12 ,= 125
31-Jan	Interest receivable	15
	Interest Income		15
	Amount to be received fromm Jeff = 1500
	Interestr at 12 % , = 1500 x 12%, =180
	monthly interest = 180 /12 , =15