Question

On January 1, 2024, the general ledger of Big Blast Fireworks includes the following account balances:

Accounts Debit Credit
Cash $ 21,900
Accounts Receivable 36,500
Allowance for Uncollectible Accounts $ 3,100
Inventory 30,000
Land 61,600
Accounts Payable 32,400
Notes Payable (8%, due in 3 years) 30,000
Common Stock 56,000
Retained Earnings 28,500
Totals $ 150,000 $ 150,000
The $30,000 beginning balance of inventory consists of 300 units, each costing $100. During January 2024, Big Blast Fireworks had the following inventory transactions:

January 3 Purchase 1,200 units for $126,000 on account ($105 each).
January 8 Purchase 1,300 units for $143,000 on account ($110 each).
January 12 Purchase 1,400 units for $161,000 on account ($115 each).
January 15 Return 100 of the units purchased on January 12 because of defects.
January 19 Sell 4,000 units on account for $600,000. The cost of the units sold is determined using a FIFO perpetual inventory system.
January 22 Receive $580,000 from customers on accounts receivable.
January 24 Pay $410,000 to inventory suppliers on accounts payable.
January 27 Write off accounts receivable as uncollectible, $2,500.
January 31 Pay cash for salaries during January, $128,000.
The following information is available on January 31, 2024.

At the end of January, the company estimates that the remaining units of inventory purchased on January 12 are expected to sell in February for only $100 each. [Hint: Determine the number of units remaining from January 12 after subtracting the units returned on January 15 and the units assumed sold (FIFO) on January 19.]

The company records an adjusting entry for $3,000 for estimated future uncollectible accounts.

The company accrues interest on notes payable for January. Interest is expected to be paid each December 31.

The company accrues income taxes at the end of January of $12,300.

Answer 1

The student's question regards accounting entries for Big Blast Fireworks, covering topics like FIFO inventory management, receivables, and expense recognition. In computing the accounting profit, revenues are reduced by explicit costs. Key transactions include sales on account, estimating uncollectibles, and interest accruals.

Step-by-step explanation:

The student's question revolves around accounting transactions for Big Blast Fireworks and covers a variety of topics such as inventory management, accounts receivable, and estimation of uncollectible accounts. The transactions in January affect various parts of the company's books including cash flow, inventory levels, payables, receivables, and expense recognition including interest and taxes. To calculate the accounting profit, we would take the total revenues and subtract the explicit costs. In Chapter 7 example, an accounting profit is represented as $1,000,000 in total revenues minus explicit costs such as labor, capital, and materials totaling $950,000, which would leave an accounting profit of $50,000. From the question, the FIFO perpetual inventory system will be used to determine the cost of goods sold when the inventory is sold on account.

Further, the student is asked to account for additional adjustments such as estimated uncollectible accounts and interest accruals on notes payable. The end-of-January information about the expected selling price of inventory helps to adjust the valuation of inventory if need be. This comprehensive question challenges the student to consider various aspects of financial accounting and the corresponding entries in the general ledger.

Answer 2

1. Inventory Adjustments: Remaining units from Jan 12: 1,300 units. Adjusting entry for future selling price: $270,000

2. Accounts Receivable and Uncollectible Accounts: Adjusting entry for uncollectible accounts: $2,500

3. Salaries: Paid cash for salaries: $128,000

4. Accounts Payable: $410,000

5. Interest on Notes Payable: $200

6. Income Tax: $12,300

7. Future Uncollectible Accounts: $3,000

How did we arrive at these values?

Let's analyze the transactions and make the necessary adjustments and entries for Big Blast Fireworks at the end of January 2024.

1. Inventory: Initial Inventory:

- 300 units at $100 each = $30,000

Purchases and Returns:

- January 3: Purchase 1,200 units at $105 each = $126,000

- January 8: Purchase 1,300 units at $110 each = $143,000

- January 12: Purchase 1,400 units at $115 each = $161,000

- January 15: Return 100 units from January 12

Calculate Total Units and Cost:

- Total units: 300 (initial) + 1,200 + 1,300 + 1,400 - 100 (return) = 4,200 units

- Remaining units from January 12: 1,400 - 100 (return) = 1,300 units

- Cost of remaining units from January 12: 1,300 units * $115 = $149,500

Cost of Units Sold (FIFO):

- Units sold on January 19: 4,000 units

- Cost of units sold: 1,200 units * $105 + 1,300 units * $110 + 1,400 units * $115 = $471,500

Calculate Remaining Units from January 12:

- Remaining units after sale: 1,300 units - 4,000 units (sold) = -2,700 units (negative because they are sold)

Adjust for Expected Future Selling Price:

- Adjusting entry: $100 (expected future selling price) * 2,700 units = $270,000

- Reduce inventory and record a loss: Debit Cost of Goods Sold $270,000, Credit Inventory $270,000

2. Accounts Receivable and Uncollectible Accounts:

- January 22: Receive $580,000 from customers

- January 27: Write off accounts receivable as uncollectible, $2,500

Adjust for Uncollectible Accounts:

- Adjusting entry: Debit Uncollectible Accounts Expense $2,500, Credit Allowance for Uncollectible Accounts $2,500

3. Salaries:

- January 31: Pay cash for salaries during January, $128,000

4. Accounts Payable:

- January 24: Pay $410,000 to inventory suppliers on accounts payable

5. Interest on Notes Payable: Accrue interest on notes payable at 8% annual rate. For one month: $30,000 * 8% / 12 = $200

- Adjusting entry: Debit Interest Expense $200, Credit Interest Payable $200

6. Income Tax: Accrue income taxes at the end of January: $12,300.

- Adjusting entry: Debit Income Tax Expense $12,300, Credit Income Tax Payable $12,300

7. Future Uncollectible Accounts: Adjusting entry: Debit Uncollectible Accounts Expense $3,000, Credit Allowance for Uncollectible Accounts $3,000