Question

Richardson, Inc. purchased raw materials worth $700 for cash. The journal entry to record this transaction will include ________. Process costing is used.

1) Debit Raw Materials Inventory $700, Credit Cash $700
2) Debit Cash $700, Credit Raw Materials Inventory $700
3) Debit Work in Process Inventory $700, Credit Cash $700
4) Debit Cash $700, Credit Work in Process Inventory $700

Answer 1

The journal entry to record the purchase of raw materials includes a debit to Raw Materials Inventory and a credit to Cash for $700. Process costing is used, which is typical when manufacturing homogeneous products. The firm's accounting profit is calculated by subtracting the total expenses ($950,000) from the sales revenue ($1,000,000), resulting in $50,000.

Step-by-step explanation:

The correct journal entry to record the purchase of raw materials worth $700 for cash in a company that uses process costing would be to debit the Raw Materials Inventory and credit Cash. This reflects an increase in inventory and a decrease in cash. Process costing is a method used to track expenses when a company produces a continuous flow of units that are indistinguishable from one another. Here's the correct journal entry:

• Debit Raw Materials Inventory $700
• Credit Cash $700

When looking at the firm's accounting profit, it can be calculated by subtracting the total expenses from the sales revenue. So, using the provided information:

• Sales Revenue: $1,000,000
• Total Expenses (Labor + Capital + Materials): $600,000 (Labor) + $150,000 (Capital) + $200,000 (Materials) = $950,000
• Accounting Profit: Sales Revenue - Total Expenses = $1,000,000 - $950,000 = $50,000