Question

The following selected information relates to Chelsea Traders, owner Roman Abramovich.

At 1st December 2018, Chelsea Traders had opening inventory of $2,400, Land $100,000 and Cash at Bank of $80,000.

Information during December was as follows

December 2 Purchased inventory costing $16,000 on account.

December 4 Returned defective goods, which cost $3,200, purchased on account on 2 December.

December 10 Sold goods for $9,600 (cost price $6,800), collecting cash of $4,000 with the remainder on account.

December 12 Goods costing $1,600, and sold on account on 10 December for $2,400, were returned by the customer.

December 14 Paid $6,000 for the amount owed on the 2 December account purchase.

December 16 Received $2,000 from the 10 December sale on account.

December 31 Physical stock take showed $9,600 of inventory on hand.

Required:

a. Prepare an extract of the Income Statement for the perpetual inventory method for December 2018.

b. Prepare an adjusted Trial Balance for the periodic inventory method after the physical stock take. Show all workings.

Answer 1

a) Firstly we need to pass journal entries for the given transactions which is shown as follows:-

Journal Entries (Amounts in $)

Date	Account Titles and Explanations	Debit	Credit
Dec 2	Inventory	16,000
	Accounts Payable		16,000
	(To record the inventory purchased on account)
Dec 4	Accounts Payable	3,200
	Inventory		3,200
	(To record the inventory returned)
Dec 10	Cash	4,000
	Accounts Receivable (9,600-4,000)	5,600
	Sales Revenue		9,600
	(To record the sales revenue)
Dec 10	Cost of goods sold	6,800
	Inventory		6,800
	(To record the cost of goods sold)
Dec 12	Sales Returns and Allowances	2,400
	Accounts Receivable		2,400
	(To record the sales returns)
Dec 12	Inventory	1,600
	Cost of goods sold		1,600
	(To record the cost of sales return)
Dec 14	Accounts Payable	6,000
	Cash		6,000
	(To record the amount paid for accounts payable)
Dec 16	Cash	2,000
	Accounts Receivable		2,000
	(To record the amount received on account)

Posting of the above transactions to ledger is shown as follows:- (Amounts in $)

Inventory
Date	Account Titles	Debit	Credit
Dec 1	Beg. balance	2,400
Dec 2	Accounts payable	16,000
Dec 4	Accounts Payable		3,200
Dec 10	Cost of goods sold		6,800
Dec 12	Cost of goods sold	1,600
Dec 31	Ending Balance (before Physical inventory Adjustment)	10,000
Dec 31	Cost of goods sold (10,000-9,600) (Adjusting entry)		400
Dec 31	Ending Balance (after adjustment)	9,600

Income Statement for The Month of Dec 2018 (Amounts in $)

Sales Revenue	9,600
Less: Sales Returns and Allowances	2,400
Net Sales		7,200
Less: Cost of goods sold (6,800-1,600+400)		5,600
Gross Profit		1,600

b) Adjusted Trial balance is shown as follows:- (Amounts in $)

Account Titles	Debit	Credit
Cash (see note 1)	80,000
Inventory (see part a)	9,600
Land (Opening balance given)	100,000
Accounts Receivable (5,600-2,400-2,000)	1,200
Accounts Payable (16,000-3,200-6,000)		6,800
Sales revenue		9,600
Sales returns and allowances	2,400
Cost of goods sold	5,600
Other Liabilities and Stockholders' Equity (beg balance) (see note 2)		182,400
Total	198,800	198,800

Notes:-

1) Calculation of Ending Cash Balance (Amounts in $)

Beginning Cash balance	80,000
Cash sales	4,000
Amount paid on account	(6,000)
Cash collected from customers	2,000
Ending Cash balance	80,000

2) Total beginning balance of $182,400 (80,000 cash, 100,000 land and 2,400 inventory) is for assets (i.e. debit side). Therefore opening total balance of liabilities and stockholders' equity is also $182,400.