Allied Parts Was Organized On May 1, 2013, And Made Its Firs

Allied Parts Was Organized On May 1 2013 And Made Its First Purchas

Allied Parts was organized on May 1, 2013, and made its first purchase of merchandise on May 3. The purchase was for 2,000 units at a price of $10 per unit. On May 5, Allied Parts sold 1,500 of the units for $14 per unit to Baker Co. Terms of the sale were 2/10, n/60. On May 7, Baker returns 200 units because they did not fit the customer's needs. Allied Parts restores the units to its inventory. On May 8, Baker discovers that 300 units are damaged but are still of some use and, therefore, keeps the units. Allied Parts sends Baker a credit memorandum for $600 to compensate for the damage. On May 15, Baker discovers that 100 units are the wrong color. Baker keeps 60 of these units because Allied Parts sends a $120 credit memorandum to compensate. Baker returns the remaining 40 units to Allied Parts. Allied Parts restores the 40 returned units to its inventory. Prepare entries for Allied Parts to record the May 5 sale and each of the above separate transactions a through c using a perpetual inventory system.

Paper For Above instruction

Introduction

The case of Allied Parts' initial operations provides a comprehensive example of inventory management and accounting transactions within a perpetual inventory system. This paper details the journal entries required for each transaction from the initial purchase through various sales adjustments encountered in May 2013, emphasizing the importance of accurate recording and inventory control in retail operations.

Initial Purchase of Merchandise

On May 3, 2013, Allied Parts made its first inventory purchase of 2,000 units at $10 per unit. Under a perpetual inventory system, the purchase is recorded directly into inventory, reflecting the company's acquisition cost. The journal entry to record this transaction is as follows:

Debit: Inventory .................... $20,000


Credit: Accounts Payable .......... $20,000

This entry increases inventory by $20,000, representing the cost of the merchandise purchased on credit.

Sale to Baker Co. on May 5

On May 5, Allied Parts sold 1,500 units at $14 per unit, with terms 2/10, n/60. Under perpetual inventory accounting, the sale affects both revenue and inventory accounts simultaneously. The sales revenue is recognized at the selling price, and cost of goods sold (COGS) is recorded at the cost per unit.

The sale revenue calculation:

1,500 units x $14 = $21,000

COGS calculation:

1,500 units x $10 = $15,000

The journal entries are:

Debit: Accounts Receivable .......... $21,000


Credit: Sales Revenue ............. $21,000


Debit: Cost of Goods Sold .......... $15,000


Credit: Inventory .................. $15,000

This records the sale and the reduction in inventory for the cost of goods sold.

Handling the Return on May 7

Baker returns 200 units due to fitting issues. The returned units are added back to inventory, at the original cost, since the inventory system is perpetual. The entry is:

Debit: Inventory .................... $2,000


Credit: Cost of Goods Sold .......... $2,000

This increases inventory and decreases COGS, reversing part of the previous sale.

Damage and Compensation on May 8

Baker finds 300 units damaged but usable. Allied Parts compensates by credit memo of $600. Since the units are still of use and kept by Baker, no physical return occurs; instead, a reduction in revenue or a credit memo is recorded. The necessary journal entry is:

Debit: Sales Returns and Allowances .. $600


Credit: Accounts Receivable .......... $600

Alternatively, some companies record a separate contra-revenue account for allowances. The inventory remains unchanged as the units are kept by Baker, and the damage is compensated financially.

Wrong Color Units and Partial Compensation on May 15

Baker reports 100 units of wrong color. Allied Parts issues a credit memo of $120, which likely reflects a credit of $1.20 per unit for the 100 units. Baker keeps 60 units; the remaining 40 units are returned.

The journal entries for this transaction include:

Debit: Sales Returns and Allowances .. $120


Credit: Accounts Receivable .......... $120

Initial compensation for wrong units is recorded here. Returning 40 units, at $10 each, back to inventory, the entry is:

Debit: Inventory .................... $400


Credit: Cost of Goods Sold .......... $400

This restores the inventory value of the returned units.

Overall Impact and Summary

The sequence of transactions illustrates the dynamic nature of inventory management in a perpetual system, involving sales, returns, damages, and allowances. Every adjustment aims to reflect the current inventory and financial position accurately, emphasizing the need for meticulous record-keeping and adherence to accounting standards.

Conclusion

In conclusion, Allied Parts' transactions exemplify core principles of inventory accounting under a perpetual system. Proper journal entries ensure accurate financial reporting, facilitate inventory control, and support sound managerial decisions. Understanding these transactions provides valuable insights into effective inventory and revenue recognition practices essential in retail accounting.

References

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