AC 210 Lecture 27: Adjusting the Inventory Account

Boston Bait Shop uses a periodic inventory system. At December 31, year 2, the accounting records include the following information:

A complete physical inventory was taken at December 31. Year 2 indicates merchandise costing $3000 remains in stock.

a. how are the amounts of beginning and ending inventory determined?

b. Compute the amount of cost of goods sold in year 2.

c. Prepare two closing entries at December 31. Year 2: the first to create a cost of goods sold account with the appropriate balance and the second to bring the inventory account up to date.

d. Prepare a partial income statement showing the shop's gross profit for the year. 

e. Describe why a company such as Boston Bait Shop would use a periodic inventory system rather than a perpetual inventory system. 

Background: This is a continuation of the activities at TECHNOGYM in January, 2017. As in past activities, TECHNOGYM uses a Jan. 1 – Dec. 31 financial year.

Exercise for Inventory:

TECHNOGYM uses a periodic inventory system for its normal operations. Following are the unadjusted account balances as of Dec. 31, 2016 for all accounts related to sales and inventory of TechTone products.

Account Debit Credit

Accounts Receivable 17,607,500

Allowance for Doubtful Accounts 20,000

Purchases 85,832,500

Inventory 2,500,000

TechTone Sales Revenue 134,500,000

TechTone Sales Returns 2,017,500

Cost of TechTone Equipment Sold 0

Upper management is contemplating changing the method used to report the cost of goods sold. They will choose the method (either FIFO or DVLIFO) that maximizes operating cash flow. The general ledger has historically been kept on a FIFO basis. Following is the inventory purchases information for 2016:

Note: For full credit, you must show documentation for both DVLIFO and FIFO calculations, with indication and reasoning for your choice.

Requirement 1: Develop a detailed schedule showing the calculation of Ending Inventory and Cost of Goods Sold using FIFO for 2016.

Requirement 2: Show the adjusting journal entry(ies) (if any) that is/are needed on Dec. 31, 2016 related to FIFO inventory. Remember to show the journal entry in proper form!

Requirement 3: Develop a detailed schedule showing the calculation of Ending Inventory and Cost of Goods Sold using DVLIFO for 2016. Hint: DVLIFO adjustments are calculated at the end of the year, using annual layers—not based on each individual purchase. TECHNOGYM used 1.07 as its DVLIFO index.

Requirement 4: Show the adjusting journal entry(ies) (if any) that would be needed on Dec. 31, 2016 if management decides to adopt the DVLIFO inventory method. Remember to show the journal entry in proper form!

Requirement 5: Using the table below, show the amounts that would appear on indicated line items of the Income Statement and Balance Sheet under the two methods.

Which method gives higher net income?

Which method gives higher assets?