Question

At the beginning of October, Bowser Company’s inventory consists of 63 units with a cost per unit of $37. The following transactions occur during the month of October.

October 4 Purchase 117 units of inventory on account from Waluigi Company for $50 per unit, terms 2/10, n/30.
October 5 Pay cash for freight charges related to the October 4 purchase, $485.
October 9 Return 20 defective units from the October 4 purchase and receipt of credit.
October 12 Pay Waluigi Company in full.
October 15 Sell 147 units of inventory to customers on account, $11,760. (Hint: The cost of units sold from the October 4 purchase includes $50 unit cost plus $5 per unit for freight less $1 per unit for the purchase discount, or $54 per unit.)
October 19 Receive full payment from customers related to the sale on October 15.
October 20 Purchase 87 units of inventory from Waluigi Company for $57 per unit.
October 22 Sell 87 units of inventory to customers for cash, $6,960.

Required:

1. Assuming that Bowser Company uses a FIFO perpetual inventory system to maintain its inventory records, record the transactions.
2. Suppose by the end of October that the remaining inventory is estimated to have a net realizable value per unit of $31. Record any necessary adjusting entry for lower of cost and net realizable value.
3. Prepare the top section of the multiple-step income statement through gross profit for the month of October after the adjusting entry for lower of cost and net realizable value. Record the cost of inventory sold.
Note: Enter debits before credits.
Date General Journal Debit Credit
October 22 Cost of Goods Sold
Inventory

Answer 1

To solve this problem, we'll go through the transactions step by step using the FIFO perpetual inventory system.

1. Record the transactions:

October 4:

Inventory: 117 units * $50 = $5,850 (Debit)

Accounts Payable (Waluigi Company): $5,850 (Credit)

October 5:

Inventory: $485 (Debit)

Cash: $485 (Credit)

October 9:

Accounts Payable (Waluigi Company): $1,000 (Debit)

Inventory: $1,000 (Credit)

October 12:

Accounts Payable (Waluigi Company): $4,850 (Debit)

Cash: $4,850 (Credit)

October 15:

Accounts Receivable (Customers): $11,760 (Debit)

Sales Revenue: $11,760 (Credit)

Cost of Goods Sold: 147 units * $54 = $7,938 (Debit)

Inventory: $7,938 (Credit)

October 19:

Cash: $11,760 (Debit)

Accounts Receivable (Customers): $11,760 (Credit)

October 20:

Inventory: 87 units * $57 = $4,959 (Debit)

Accounts Payable (Waluigi Company): $4,959 (Credit)

October 22:

Cash: $6,960 (Debit)

Sales Revenue: $6,960 (Credit)

Cost of Goods Sold: 87 units * $54 = $4,698 (Debit)

Inventory: $4,698 (Credit)

2. Adjusting entry for lower of cost and net realizable value (LNRV):

October 31:

Inventory (LNRV adjustment): $17 * ($37 - $31) = $102 (Debit)

Cost of Goods Sold: $102 (Credit)

This entry reduces the value of the remaining inventory to its estimated net realizable value.

3. Prepare the top section of the income statement:

Now, let's prepare the top section of the multiple-step income statement through gross profit for the month of October after the LNRV adjustment.

Sales Revenue: $11,760 + $6,960 = $18,720

Cost of Goods Sold: $7,938 + $4,698 + $102 = $12,738

Gross Profit = Sales Revenue - Cost of Goods Sold

Gross Profit = $18,720 - $12,738 = $5,982

So, the gross profit for the month of October is $5,982.