A Company Using The Perpetual Inventory System Purchased Inv

A Company Using The Perpetual Inventory System Purchased Inventory

1 A Company Using The Perpetual Inventory System Purchased Inventory

Analyze and solve various inventory accounting scenarios involving perpetual inventory systems, including calculations for purchase discounts, ending inventory under specific inventory costing methods (FIFO and LIFO), and journal entries for sales transactions utilizing specific identification and cost of goods sold methods.

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In modern inventory management, companies often employ the perpetual inventory system due to its real-time tracking capabilities. This method allows accurate calculation of inventory levels and cost of goods sold (COGS) immediately when transactions occur. The scenarios presented highlight different aspects of inventory accounting, including purchase discounts, inventory valuation methods, and journal entries, which are fundamental to financial reporting and managerial decision-making.

Scenario 1: Purchase Discount Calculation

A company purchased inventory valued at $21,000 on credit with payment terms of 3/10, n/30. This indicates that the company can take a 3% discount if paid within 10 days; otherwise, the net amount is due in 30 days. Two days after the purchase, the company returned defective inventory worth $1,000. The perishable inventory purchase was adjusted accordingly.

Since the purchase is made within the discount window, and assuming the company pays within 10 days, the discount applicable would be 3%. The gross purchase amount after return equates to $20,000 ($21,000 - $1,000). The discount, therefore, is 3% of $20,000, equaling $600. The credited amount upon payment would be $19,400 ($20,000 - $600).

It's essential to note that the return affects the net payable, and the discount is calculated based on the net invoice amount after returns. This scenario exemplifies how companies utilize purchase discounts to reduce costs and improve cash flow, emphasizing the importance of accurate recording and timely payments.

Scenario 2: Ending Inventory Calculation Using LIFO Method

A company purchased 100 units at $30 each on January 31 and 400 units at $20 each on February 28. During the fiscal year, the company sold 470 units from March 1 through December 31. Using the perpetual inventory system and the last-in, first-out (LIFO) assumption, the ending inventory needs to be calculated.

The total units purchased are 500 (100 + 400). The company sold 470 units, leaving 30 units in inventory at year-end. Under LIFO, the most recent purchases are sold first. The 400 units purchased on February 28 at $20 per unit are fully sold, accounting for 400 units. The remaining 70 units sold come from the January 31 batch at $30 per unit, but since only 100 units were purchased at $30, the rest of the 470 units sold are from that batch.

Calculating ending inventory:

  • Remaining units from January 31 purchase: 100 units - 70 units sold = 30 units
  • Value of ending inventory: 30 units at $30 = $900

This calculation illustrates how the LIFO method assigns the most recent costs to COGS, resulting in higher COGS during inflationary periods and lower ending inventory values. The ending inventory amount on December 31 would be $900, accurately reflecting the cost layers remaining.

Scenario 3: Lower-of-Cost-or-Market (LCM) Application

Misty, Inc. recorded 24,000 units of inventory at $8 per unit, totaling $192,000, using FIFO. The current replacement cost per unit is $4.50, which is lower than the original cost. Applying the lower-of-cost-or-market rule ensures conservatism in financial reporting by reducing inventory value to reflect lower replacement cost.

The total inventory value under LCM would be 24,000 units at $4.50 per unit, amounting to $108,000. Therefore, the company must write down its inventory from $192,000 to $108,000, recording a loss on inventory and adjusting the book value accordingly. This adjustment provides a realistic valuation of inventory on the balance sheet and aligns with accounting standards requiring the recognition of potential losses in a timely manner.

Thus, the amounts that would be reported as Ending Merchandise Inventory are $108,000, reflecting the lower-of-cost-or-market rule.

Scenario 4: Specific Identification Method for Inventory Cost

A company using the perpetual system purchased 500 pallets of industrial soap costing $10,000, with an additional $750 freight-in. The total cost of the inventory is therefore $10,750. The company sold the entire lot to a supermarket chain for $14,000 on account, employing the specific identification method.

This method involves tracing the actual cost of each specific item sold. Since the entire inventory was sold, the cost of goods sold (COGS) will include the full cost of $10,750. Accordingly, the journal entry to record the sale involves debiting accounts receivable for $14,000 and crediting sales revenue, with a corresponding debit to COGS for $10,750 and a credit to inventory for the same amount.

The correct journal entry is:

Dr. Accounts receivable $14,000


Cr. Sales revenue $14,000


Dr. Cost of Goods Sold $10,750


Cr. Inventory $10,750

This showcases the application of the specific identification method in accurately matching costs with revenues, crucial for high-value or unique inventory items.

Scenario 5: Recording a Sale with Cost of Goods Sold

A company made a sale of goods worth $2,500 on account. The purchase cost of the inventory sold was $500. Using the perpetual inventory system, the journal entry to record this sale involves recognizing revenue and COGS simultaneously.

The proper journal entries are:

Dr. Accounts receivable $2,500


Cr. Sales revenue $2,500


Dr. Cost of Goods Sold $500


Cr. Inventory $500

This transaction accurately reflects the sale revenue and the reduction in inventory at the cost associated with the sold goods, complying with accounting principles for revenue and expense recognition.

References

  • Hamer, K. (2018). Accounting Principles (13th ed.). Pearson.
  • Gordon, R. A. (2019). Financial Accounting. McGraw-Hill Education.
  • Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2019). Financial Accounting (12th ed.). Wiley.
  • Gelinas, U. J., & Sutton, S. G. (2019). Accounting Information Systems (11th ed.). Cengage Learning.
  • Wild, J. J., & Subramanyam, K. R. (2019). Financial Statement Analysis (12th ed.). McGraw-Hill Education.
  • IFRS Foundation. (2020). International Financial Reporting Standards (IFRS). IFRS Foundation.
  • FASB. (2021). Accounting Standards Codification (ASC). Financial Accounting Standards Board.
  • Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2020). Financial Accounting Theory and Analysis: Text and Cases. Wiley.
  • AccountingTools. (2023). Inventory Costing Methods. https://www.accountingtools.com/articles/what-are-inventory-costing-methods.html
  • Investopedia. (2022). Lower of Cost or Market (LCM). https://www.investopedia.com/terms/l/lower-of-cost-or-market.asp

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