Problem 3 – 25 Comprehensive Cycle Problem: Perpetual System

Problem 3 – 25 Comprehensive cycle problem: Perpetual system at the beginning of 2012

Identify these events as asset source (AS), asset use (AU), asset exchange (AE), or claims exchange (CE). Then, record each event using a statement model including Assets, Liabilities, Equity, and Income Statement components. Prepare an income statement, a statement of changes in stockholders’ equity, a balance sheet, and a statement of cash flows based on the transactions provided.

Paper For Above instruction

The problem involves analyzing a series of events that impacted the financial position of Jeater Company during 2012, under a perpetual inventory system. The task requires classification of each event according to its effect on assets, liabilities, or equity, followed by accurate journal entries within a statement model. Subsequently, the creation of the core financial statements—income statement, statement of changes in stockholders’ equity, balance sheet, and statement of cash flows—is necessary to reflect the company’s financial activity for the period.

Event Classification and Journal Entries

1. Purchase inventory costing $2,200 on account from Blue Company under terms 1/10, n/30. Merchandise delivered FOB shipping point with freight of $110 paid in cash.

Classification: Asset exchange (AE) — Increase inventory and accounts payable; cash decreases for freight.

Journal Entry:

Debit Inventory $2,310 (2,200 + 110), Credit Accounts Payable $2,200, Credit Cash $110

2. Return damaged inventory costing $200, freight costs paid by freight company.

Classification: Asset exchange (AE) — Reduce inventory.

Journal Entry:

Debit Accounts Payable $200, Credit Inventory $200

3. Pay the amount due on its account payable to Blue Company within the discount period.

Classification: Asset exchange (AE) — Reduce cash and accounts payable.

Assuming the discount: 1% of $2,000 = $20; total payment: $2,180 (minus discount).

Journal Entry:

Debit Accounts Payable $2,200, Credit Cash $2,180, Credit Purchase Discount $20

4. Sold inventory costing $3,000 for $5,500 on account, terms 2/10, n/45.

Classification: Claims exchange (CE) and asset exchange (AE) — Increase accounts receivable and revenue, decrease inventory.

Journal Entry:

Debit Accounts Receivable $5,500, Credit Sales Revenue $5,500

Debit Cost of Goods Sold $3,000, Credit Inventory $3,000

5. Customer returns merchandise originally costing $400 and sold for $710 cash. Customer paid immediately.

Classification: Claims exchange (CE) and asset exchange (AE) — Reduce accounts receivable and inventory, record sales return.

Journal Entry:

Debit Sales Returns and Allowances $710, Credit Accounts Receivable $710

Debit Inventory $400, Credit Cost of Goods Sold $400

6. Deliver goods FOB destination; paid freight costs of $60 cash.

Classification: Asset exchange (AE) — Decrease cash, recognize freight expense.

Journal Entry:

Debit Freight-Out/Delivery Expense $60, Credit Cash $60

7. Collected the receivable within discount period.

Classification: Asset exchange (AE) — Increase cash, decrease accounts receivable.

Assuming timely collection with discount: 2% of $5,500 = $110; cash received: $5,390.

Journal Entry:

Debit Cash $5,390, Credit Accounts Receivable $5,390

8. Inventory on hand at year-end is counted as $7,970.

Classification: Asset exchange (AE) — Adjust inventory to physical count.

Assuming previous inventory was higher, a journal entry to adjust inventory would be necessary if adjustments are needed.

Financial Statements Preparation

Using the journal entries and event classifications, the standard financial statements would be prepared following the accounting cycle for a perpetual inventory system. The income statement would reflect total revenues and expenses, including sales, cost of goods sold, freight, and returns. The statement of changes in stockholders’ equity would detail retained earnings adjustments, while the balance sheet would summarize assets, liabilities, and equity at period-end after adjusting inventory to physical count. Lastly, the statement of cash flows would categorize cash transactions into operating, investing, and financing activities, illustrating the company's cash position’s evolution during 2012. Accurate calculation of net income, adjusting entries, and account balances are critical in ensuring faithful financial reporting.

Conclusion

In conclusion, understanding and correctly classifying transactions are essential for accurate financial reporting under a perpetual inventory system. Proper journal entries that reflect asset, liability, equity, and revenue/expense impacts are foundational. Preparing comprehensive financial statements ensures stakeholders can assess the company's financial health based on timely and accurate data.

References

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