Question

Part a VenRam Stationery & Supplies sells a variety of school supplies including a variety of calculators. The business began the first quarter (January to March) of 2018 with 20 (Casio fx-85MS) calculators at a total cost of $124,800.

During the quarter, the company completed the following transactions. January 8 105 calculators were purchased at a cost of $5,840 each. In addition the business paid a freight charge of $610 cash on each calculator to have the inventory shipped from the point of purchase to their warehouse.

January 31 The sales for January were 85 calculators which yielded total sales revenue of $767,550. ( 25 of these units were sold on account to longstanding customers)

February 4 A new batch of 65 calculators was purchased at a total cost of $448,500

February 10 10 of the instruments purchased on February 4 were returned to the supplier, as they were not of the model ordered.

February 28 During the month 58 calculators were sold at a price of $9,660 each.

March 4 A customer, to whom 9 calculators were sold during the first business day of February, returned 2 of the instruments, as they were of another brand.

March 10 Owing to an increased demand, a further 118 calculators were purchased at a cost of $7,500 each; these were subject to a trade discount of 2% each.

March 31 125 calculators were sold during March at a unit selling price of $10,300.

March 31 An actual count of inventory was carried out which revealed that there were 28 units of that brand of merchandise in the store room.

Unless otherwise stated, assume that all purchases were on account and received on the dates stated. Required: i) Prepare a perpetual inventory record for this merchandise, using the first in, first out (FIFO) method of inventory valuation to determine the company’s cost of goods sold for the quarter and the value of ending.

ii) Given that selling, distribution and administrative costs for the quarter were $112,840, $102,100 and $103,760 respectively,

prepare an income statement for VenRam Stationery & Supplies for the quarter ended March 31, 2018.

iii) Journalize the January transactions, assuming the company uses a: - Periodic inventory system - Perpetual inventory system

iv) The manager of VenRam has stated that his objective is to cut back on his tax liability and is of the view that the FIFO method would be best. Do you agree with him?

Part b Callahan Computers stores its inventory in a warehouse that was destroyed by Hurricane Irma in September 2018. The business began the year with inventory of $350,000. During the year, the business made net purchases of $1,600,000 and had net sales of $2,500,000. The company’s gross profit has historically been 30% of net sales revenue. Use the gross profit method to estimate the cost of the ending inventory destroyed in the hurricane.

Answer 1

Under the perpetual inventory recording system, all transactions with respect to inventory are recorded directly to the inventory account and provides an up to date inventory balance. Pls find below the table for perpetual inventory record system for the given question. Pls note that since, FIFO is to be followed, all inventory have been used for sales in that order itself.

Pls note that loss due to theft or any other reason of 4 units will be charged to COGS.

ii) Income statement:

Sales = Sales in Jan + Sales in Feb - Sales return of Feb inventory in March + Sales in Mar

= 767550 + (58 x 9660) - (2 x 9660) + (125 x 10300) = 2,596,010

COGS = 1,856,550

Gross profit = 739,460

Selling exp = 112840

Distribution exp = 102100

Administrative exp = 103760

Net profit = 420,760.

iv) Since the purchase price of calculators is rising, using a LIFO method will lead to higher COGS and lower closing inventory. Hence in order to cut back tax liability, the manager should use LIFO method and not FIFO.

Part b) The gross profit method is a technique for estimating closing balance of inventory.

It can be calculated as follows:

Op inventory = 350,000

Purchases = 1,600,000

Exp cost of goods available = 350,000 + 1,600,000 = 1,950,000

Cost of goods sold = 70% of sales = 2,500,000 x 70% = 1,750,000 (100% - Profit margin %)

Estimated inventory = 1,950,000 - 1,750,000 = 200,000