Question

1.Davis Hardware Company uses a perpetual inventory system. How should Davis record the sale of merchandise, costing $620, and sold on account for $960?

2.On December 31, 2021, Coolwear, Inc. had a balance in its prepaid insurance account of $48,400. During 2022, $86,000 was paid for insurance. At the end of 2022, after adjusting entries were recorded, the balance in the prepaid insurance account was 42,000. Insurance expense for 2022 would be:
A. $6,400.
B. $134,400.
C. $86,000.
D. $92,400.

Answer 1

In a perpetual inventory system, Davis Hardware Company should record the sale of merchandise by debiting Accounts Receivable and Sales Revenue, and crediting Cost of Goods Sold and Inventory. Insurance expense for 2022 would be $6,400.

Step-by-step explanation:

In a perpetual inventory system, Davis Hardware Company should record the sale of merchandise by making the following journal entry:

1. Debit Accounts Receivable for $960 (the selling price of the merchandise)
2. Credit Sales Revenue for $960
3. Debit Cost of Goods Sold for $620 (the cost of the merchandise)
4. Credit Inventory for $620

This journal entry records the revenue from the sale of merchandise and the corresponding reduction in inventory.

Insurance expense for 2022 would be $6,400. This can be calculated by subtracting the ending balance in the prepaid insurance account ($42,000) from the sum of the beginning balance ($48,400) and the amount paid for insurance during 2022 ($86,000): $48,400 + $86,000 - $42,000 = $6,400.