Question

Esperado Furnishings are retailers who purchase and sell household furnishings, including table lamps. The business uses a perpetual inventory system and adjusts cost of goods sold for any shortage or excess inventory. The business began the last quarter of 2018 with merchandise inventory of 10 pairs of “Italia” table lamps at a total cost of $168,200.

The following transactions, relating to the “Italia” brand were completed during the quarter:

October 5	Purchased 15 pairs of lamps at a cost of $17,020 per pair
October 14	Sold 18 pairs of lamps to Muller Furnishings at $22,250 per pair
October 22	Purchased 24 pairs at a cost of $18,175 per pair but the supplier gave a 4% quantity discount.
November 10	Sold 15 pairs of lamps to Orion Household Ltd and 10 pairs to Brown’s Furnishings which yielded total sales revenue of $589,750.
November 12	Owing to an increased demand for this product, 30 pairs of lamps were purchased on account at a cost of $17,612 per pair. In addition, Esperado paid $288 in cash on each pair of lamps to have the inventory shipped from the vendor’s warehouse to Esperado’s showroom.
November 27	Sold 23 pairs of lamps to Middletown Company at a price of $25,080 per pair.
November 30	An actual count of inventory was carried out which revealed that there were 15 pairs of the “Italia” brand in the warehouse.
December 2	In preparation for the festive season, Esperado purchased 25 pairs of lamps at a total cost of $474,500.
December 15	5 pairs of the lamps purchased on December 2 were returned to the supplier, as they were not of the brand ordered.
December 30	Sold 22 pairs of lamps to two customers (Omega Traders & Middleton Furnishings) at a selling price of $26,550 per pair.

All purchases were on account and received on the dates stated. Required:

1. Prepare a perpetual inventory record for Esperado Furnishings, using the first in, first out (FIFO) method to determine the value of ending inventory at December 31, 2018, and the total amount to be assigned to cost of goods sold for the period.

2. Given that selling, distribution and administrative costs for the quarter were $23,445, $10,250 and$75,435 respectively, prepare an income statement for Esperado Furnishings for the period, to determine the net profit for the quarter, assuming the perpetual inventory system.

3. You are told that 8 pairs of lamps sold on November 27, 2018 were on account. State the journal entries necessary to record the transactions on November 12 and November 27, assuming the business uses a:

- Perpetual inventory system

- Periodic inventory system

4. Assuming that Esperado sold 86 pairs of “Italia” brand of lamps during the quarter; determine the value of ending inventory and cost of goods sold assuming the business used the periodic system and the LIFO method?

Answer 1

i).

Inventory Record
Date	Purchases			Cost of Goods sold			Inventory On Hand
	Quantity	Unit cost	Total cost	Quantity	Unit cost	Total cost	Quantity	Unit cost	Total cost
1st Oct							10	16820	168200
5th Oct	15	17020	255300				10	16820	168200
							15	17020	255300
14th Oct				10	16820	168200
				8	17020	136160	7	17020	119140
22nd Oct	24	18175	436200				7	17020	119140
							24	18175	436200
10th Nov				7	17020	119140
				18	18175	327150	6	18175	109050
12th Nov	30	17900	537000				6	18175	109050
							30	17900	537000
27th Nov				6	18175	109050
				17	17900	304300	13	17900	232700
30th Nov							15	17900	268500
2nd Dec	25	18980	474500				15	17900	268500
							25	18980	474500
15th Dec				5	18980	94900	15	17900	268500
							20	18980	379600
30th Dec				15	17900	268500
				7	18980	132860	13	18980	246740
Total	94		1703000	93		1660260

Cost Of Goods Sold = 1660260-94900 = 1565360

ii).

Esperado Furnishings
Income Statement
Revenue			2151190
Cost Of Goods Sold		1660260
Purchase Returns		-94900	1565360
Gross Profit			585830
Expense
Selling		23445
Distribution		10250
Administrative		75435
Total Expense			109130
Earnings			476700

iii). A). Perpetual Inventory System

Esperado Furnishings
Journal Entries
Perpetual Inventory System
Date	Particulars	Debit	Credit
12th Nov	Inventory	537000
	To Cash		537000
27th Nov	Accounts Receivable	200640
	Cash	376200
	To Sales		576840
	Cost Of Goods Sold	413350
	To Inventory		413350

B). Periodic Inventory System

Esperado Furnishings
Journal Entries
Periodic Inventory System
Date	Particulars	Debit	Credit
12th Nov	Inventory	528360
	Freight In	8640
	To Cash		537000
27th Nov	Accounts Receivable	200640
	Cash	376200
	To Sales		576840

iv). On Assuming a sales of 86 pairs of Italia brand the number of closing units will be 13, considering LIFO system of inventory management the value of closing stock will be

Opening Stock	10
Purchases	94
Purchase Returns	-5
Sales	-86
Closing Stock	13

10 X 16820	168200
3 X 17900	125300
Closing Value Under LIFO	293500