Question

Explosive Entertainment Inc. (EEI) is a wholesaler that sells three lines of sound systems. Pertinent details of the company follow:

• EEI purchases and resells the outdoor Product A and jogging Product B sound systems without alteration. For its indoor Product C sound system, EEI purchases the three component parts from separate producers and then assembles the finished product on its premises.

• EEI tracks its inventory using a perpetual inventory system and values it using the weighted average cost formula.

• The terms of all of EEI’s sales are FOB shipping point — that is, EEI records revenue when the product is shipped from its premises. EEI normally offers credit terms of 2/10, net 30 to its retail clients. The company records its accounts receivable using the gross method. EEI sells strictly on a cash basis to unestablished new clients. EEI also occasionally offers extended payment terms to well-established clients, and tailors the credit terms to suit the specific situation.

• The terms of all of EEI’s purchases are FOB destination — that is, EEI takes ownership of the goods when received from the vendor. All but one of EEI’s suppliers offer 30-day credit terms to the company. The exception is Active Co., which supplies the jogging sound system (Product B). Active Co. offers EEI terms of 1/15, net 30. EEI records its accounts payable using the gross method.

• While the resulting journal entries will all be entered to the nearest dollar, EEI rounds all dollar-based calculations to the nearest whole cent (for example, $21.46) and percentages to two decimal places (for example, 13.41%). You should do likewise in your supporting calculations.

• EEI’s opening inventory as at December 1, 20X4, follows:

	Product	Units	Cost Per Unit	Total Cost
Finished Inventory
Outdoor	A	384	$110	$42,240
Jogging	B	422	$46	$19,412
Indoor	C	239	$132	$31,548
WIP Inventory
Receivers	C1	62	$50	$3,100
Ampliefiers	C2	58	$40	$2,320
Speakers	C3	115	$20	$2,300
				$100,920
				Product C — components of indoor sound system and number of units Receiver (C1) 1 unit Amplifier (C2) 1 unit Speaker (C3) 2 units Conversion costs $5 per finished indoor sound system (Product C) Note: Conversion costs are debited to inventory and credited to wage expense. • EEI maintains separate general ledger accounts for finished inventory and work-in- progress (WIP) inventory. • EEI’s inventory-related transactions for December 20X4 (not recorded in the company’s accounting records) are as follows: December 1, 20X4 i) EEI received 100 units of Product A from Electronics Ltd. at a cost of $105 per unit plus a total of $200 freight-in. ii) EEI received 200 units of Product B from Active Co. at a total cost of $8,800. iii) EEI received a $9,800 payment on account from Mega Retailer Corp. (MRC) within the 10-day discount period for goods sold in November 20X4. December 6, 20X4 iv) EEI sold 80 units of Product A for $16,000 cash. December 8, 20X4 v) EEI received 200 units of Product A from Electronics Ltd. at a cost of $98 per unit plus $300 freight-in and $980 GST. vi) EEI received an $11,500 payment on account from MRC. This payment was received 25 days after the invoice date for goods sold in November 20X4. vii) EEI assembled 50 units of Product C. 3 December 12, 20X4 viii) EEI paid the invoice pertaining to the units of Product B received on December 1, 20X4. ix) EEI accepted a one-year, interest-free, $57,000 note from Stereo Discounter Corp. (SDC) in exchange for 200 units of Product C. The cash-equivalent sales price for the goods was $54,000. x) EEI shipped 100 units of Product A to Clarity Inc. and invoiced the company for $20,000. December 18, 20X4 xi) EEI received payment in full from Clarity for the sale of Product A on December 12, 20X4. xii) EEI shipped 300 units of Product B to Clarity on a priority basis and invoiced the customer for $27,700, including $100 of freight costs. December 24, 20X4 xiii) EEI sold 150 units of Product A to Renegade Retail Corp. (RRC) for $30,000 before an expected price increase took effect on January 1, 20X5. As RRC does not have sufficient storage space on its premises, EEI has agreed to store the inventory at its premises on behalf of the customer. Given the generic nature of the product and as EEI almost always has this inventory in stock, EEI did not specifically segregate the inventory that it agreed to sell to RRC. December 30, 20X4 xiv) EEI shipped 50 units of Product A to RRC relating to the sale of goods on December 24, 20X4. xv) EEI received payment in full from Clarity for the sale of Product B on December 18, 20X4. • During December 20X4, there were several factors that impacted both the price that EEI pays for its product and the price for which it can sell the finished product. EEI compiled the information that follows with the effective date of these costs and prices being December 31, 20X4. Replacement Cost Sale Price Cost to Sell Product A $80 $150 $3 Product B $25 $38 $2 Product C $270 0 Component C1 $40 Component C2 $30 Component C3 $15 • EEI reviewed its accounts receivable at its December 31, 20X4, year end and determined that it needed an allowance for doubtful accounts equal to the following: o 1% of accounts aged from 0 to 30 days o 2% of accounts aged from 31 to 60 days o 5% of accounts aged from 61 to 90 days o 50% of accounts aged 91 days and longer • A summary of EEI’s accounts receivable and other pertinent information follows: Summary aging report — December 31, 20X4 0-30 Days 31-60 Days 61-90 Days 91+ Days Total $89,142.13 $45,241.79 $13,462.54 $6,311.97 $154,158.43 Allowance for doubtful accounts — January 1, 20X4 $3,541.87 Bad debt expense provided for during 20X4 4,800.00 Write-offs of accounts receivable during 20X4 4,721.48 Recovery of bad debts in 20X4 previously written off 891.67 Required: a) Calculate the cost of goods sold (COGS) for the month of December 20X4 before the required adjustments, if any, are made to value EEI’s inventory at the lower of cost and net realizable value. Provide separate totals for each category of inventory as well as the total COGS. b) Calculate the closing inventory as at December 31, 20X4, after the required adjustments, if any, are made to value EEI’s inventory at the lower of cost and net realizable value. Provide separate totals for each category of inventory as well as the total inventory holdings. c) Determine the remaining bad debt expense that needs to be recorded by EEI at the end of the 20X4 fiscal year. d) Record the journal entries pertaining to the identified transactions in the same order as those presented in the question. Ensure that the journal entries are dated and include a brief description of the pertinent details. Supporting calculations are to be referenced or included in the description. e) Record the year-end adjusting journal entries pertaining to: i) the valuation of inventory at the lower of cost and net realizable value; ii) the bad debt expense for the year; and iii) the accrual of interest revenue.

Answer 1

a) Cost of Good Sold
		Product
		Outdoor			Jogging			Indoor
		A			B			C
		Units	Rate	$	Units	Rate	$	Units	Rate	$
Cost of Goods is as per below
Opening Stock		384	110	42240	422	46	19412	239	132	31548
Add: Purchases		300	211.4	31580	200	44	8800	0	0	0
Assembly pf Product C								50		6750
Sub-total		684	107.92	73820	622	45.36	28212	289	132.52	38298
Less: Closing stock		354	107.73	38,137	322	45.36	14,605	89	132.52	11,794
Cost of Goods is		330	108.13	35,683	300	45.36	13,607	200	132.52	26,504
b) Cost of Closing Inventory is worked out below
		Product
		Outdoor			Jogging			Indoor
		A			B			C
		Units	Rate	$	Units	Rate	$	Units	Rate	$
Dec 1, 20X4	Opening Inventory	384	110	42240	422	46	19412	239	132	31548
Dec 1, 20X4	AddL Purchases	100	107	10700	200	44	8800
	Sub-total	484	109.38	52940	622	45.36	28212
Dec 6, 20X4	Cash Sales	-80	109.38	-8,750
Dec 8, 20X4	AddL Purchases	200	104.40	20880
Dec 8, 20X4	Product C assembled							50	130	6500
	Conversion costs									250
	Sub-total	604	107.73	65,070	622	45.36	28,212	289	132.52	38298
Dec 12, 20X4								-200	132.52	-26503.8
Dec 12, 20X4	Sales	-100	107.73	-10,773
Dec 18, 20X4	Sales				-300	45.36	-13,607
	Sub-total	504	107.73	54,296	322	45.36	14,605	89	132.52	11,794
Dec 24, 20X4	sales	-150	107.73	-16,160
	Closing Balance	354	107.73	38,137	322	45.36	14,605	89	132.52	11,794
	WIP Inventory (workings)
		Product
Date		C1			C2			C3
		Units	Rate	$	Units	Rate	$	Units	Rate	$
Dec 1, 20X4	Opening Inventory	62	50	3100	58	40	2320	115	20	2300
Dec 8, 20X4	Product C 50 units
	assembled	-50	50	-2500	-50	40	-2000	-100	20	-2000
		12	50	600	8	40	320	15	20	300
d) Journal Enries
	Date	Particulars						Dr	Cr
	Dec 1, 20X4	Product A			Dr			10500
		Product A			Dr			200
		- To Electronics Ltd							10700
		(Being 100 units of Product A received
		from Electronic Ltd)
	Dec 1, 20X4	Product B			Dr			8800
		- To Active Co.							8800
		(Being 200 units of Product B received
		from Active Co.
	Dec 6, 20X4	Cash A/c                            Dr						16000
		- Product A							16000
		(Being 80 units sold for cash)
	Dec 8, 20X4	Product A			Dr			19600
		Product A			Dr			300
		GST Tax			Dr			980
		- To Electronics Ltd							20880
		(Being 200 units of Product A received
		from Electronic Ltd)
	Dec 8, 20X4	Cash A.c			Dr			11500
		- To MRC							11500
		(Being money received from MRC)
	Dec 8, 20X4	Product C			Dr			6500
		Product C			Dr			250
		- To WIP C1							2500
		- To WIP C2							2000
		- To WIP C3							2000
		- To Wage expenses							250
		(Being assemble costs of 50 units of Product C)
	Dec 12, 20X4	Active Co.			Dr			8800
		- To Cash							8800
		(Being payment made to Active Co. no
		discount availed)
	Dec 12, 20X4	Cash						54000
		Stereo Discounter Corpn						3000
		- To Product C							57000
		(Being sale booked for 200 units of product C
		sold to Stereo Discounter Corpn, extra $3000
		note accepted accounted)
	Dec 12, 20X4	Clarity Inc.			Dr			20000
		To Product A							20000
		(Being 100 units sold to Clarity Inc.)
	Dec 18, 20X4	Cash A/c			Dr			19600
		Sales Discount			Dr			400
		To Clarity Inc.							20000
		(Being payment received from Clarity Inc.
		cash discount availed)
	Dec 18, 20X4	Clarity Inc.			Dr			27700
		To Product B							27700
		(Being 300 units sold to Clarity Inc.)
	Dec 24, 20X4	Renegade Retail Corpn			Dr			30000
		To Product A							30000
		(Being 150 units sold to Renegade)
	Dec 30, 20X4	Cash A.c			Dr			27700
		- To Clarity Inc.							27700
		(Being money received from CLARITY)
e) Journal enteries
	Dec 30, 20X4	Bad Debts			Dr			2,083.50
		To Bad debts allowance							2,083.50
		(Being additional bad debts provided)
	Dec 30, 20X4	Bad debts			Dr			1,270.35
		To Sales							1,270.35
		(Being bad debts accounted)
c) Bad Debts Provisions working
		Aging Report
		0-30 Days	31-60 Days	61-90 Days	91+ Days	Total
	Total Debtors	$89,142.13	$45,241.79	$13,462.54	$6,311.97	$154,158.43
	Allowance rate	1%	2%	5%	50%
	Allowance needed	891.42	904.84	673.13	3,155.99	5,625.37
	Allowance for doubt
	ful debts in books					3541.87
	Further allowance
	needed					2,083.50
	Bad debts provided				4,800.00
	write off				-4721.48	78.52
	recovery of bad debts					-891.67
	Bad Debts to be accounted					1,270.35
Note the factors faced by the company is assumed given for sake of information only. These factors have already been built in sales price and costs and no further enteries need to be passed on them