Question

Now that operations for outdoor clinics and TEAM events are running smoothly, Suzie thinks of another area for business expansion. She notices that a few clinic participants wear multiuse (MU) watches. Beyond the normal timekeeping features of most watches, MU watches are able to report temperature, altitude, and barometric pressure. MU watches are waterproof, so moisture from kayaking, rain, fishing, or even diving up to 100 feet won’t damage them. Suzie decides to have MU watches available for sale at the start of each clinic. The following transactions relate to purchases and sales of watches during the second half of 2019. All watches are sold for $304 each. Jul. 17 Purchased 54 watches for $8,316 ($154 per watch) on account. Jul. 31 Sold 44 watches for $13,376 cash. Aug. 12 Purchased 44 watches for $7,216 ($164 per watch) cash. Aug. 22 Sold 34 watches for $10,336 on account. Sep. 19 Paid for watches ordered on July 17. Sep. 27 Received full payment for watches sold on account on August 22. Oct. 27 Purchased 84 watches for $14,616 ($174 per watch) cash. Nov. 20 Sold 94 watches for $28,576 cash. Dec. 4 Purchased 108 watches for $19,872 ($184 per watch) cash. Dec. 8 Sold 44 watches for $13,376 on account.

1-a Calculate sales revenue, cost of goods sold, and ending inventory as of December 31, 2019, assuming Suzie uses FIFO to account for inventory.

1-b. Prepare the gross profit section of a partial income statement for transactions related to MU watches.

2. Late in December, the next generation of multiuse (MU II) watches is released. In addition to all of the features of the MU watch, the MU II watches are equipped with a global positioning system (GPS) and have the ability to download and play songs and videos off the internet. The demand for the original MU watches is greatly reduced. As of December 31, the estimated net realizable value of MU watches is only $104 per watch.

2a. Record any necessary adjustment on December 31, 2019, related to this information.(If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
  

2b. Prepare an updated gross profit section of a partial income statement accounting for this additional information.

Answer 1

Sales Revenue
		Number	per unit	Total
Jul 31	Cash	44	304	13376
Aug 22	On Account	34	304	10336
Nov 20	Cash	94	304	28576
Dec 8	On Account	44	304	13376
		216		$       65,664

Purchase/Cost of Good Sold
		Number	per unit	Total
Jul 17	On Account	54	154	8316
Aug 12	Cash	44	164	7216
Oct 27	Cash	84	174	14616
Dec 4	Cash	108	184	19872
		290		$       50,020

As Per FIFO Inventory
Total Purchased units		290
Total Sold Units		216
Inventory (290-216)		74
Cost of inventory will be purchased price of last purchase because last purchase quantity is less than inventory.
hence Inventory will be (74x$184)			$       13,616

Partial Income Statement
For the period 1 July to 31 Dec 2019
Dr			Cr
Particulars	Amt	Particulars	Amt
To Opening Stock	-	By Sales	65,664
To Cost of Goods sold	50,020	By Closing Stock	13,616
To Gross Profit	29,260
	79,280		79,280

Part 2

For Inventory valuation we need to follow lower of Cost or Net realizable value method of accounting. In this scenario or cost is $184 and Net Realizable value is $104. Hence loss of $80 per watch is incurred. Journal Entry will be as follows:

Entity may choose either of the following options:

1. Report the loss as cost of sales/cost of goods sold
2. Report the loss separately

1 cost of sales method:

Write-down loss is: ($80 x 74 = $5,920). The journal entry will be as following:

Cost of goods sold a/c …..Dr	$5,920
By Inventory a/c		$5,920

2 Separate account method:

In this method a separate account with appropriate title e.g. “Inventory written-down loss” will be used to record the loss which is later closed in profit and loss as follows:

Inventory written-down loss a/c	$5,920
Inventory a/c		$5,920

Closing entry will be:

Profit and loss a/c	$5,920
Inventory written-down loss a/c		$5,920

As per Method one Updated Income stamen will be.

Partial Income Statement
For the period 1 July to 31 Dec 2019
Dr			Cr
Particulars	Amt	Particulars	Amt
To Opening Stock	-	By Sales	65,664
To Cost of Goods Sold	44,100	By Closing Stock	7,696
To Gross Profit	29,260
	79,280		73,360