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# 3. 3. Perpetual inventory system: journal entries. At the beginning

3. 3. Perpetual inventory system: journal entries. At the beginning of 20X3, Beehler Company implemented a computerized perpetual inventory system. The first transactions that occurred during 20X3 following.
• Purchases on account: 500 units @ \$4 = \$2,000
• Sales on account: 300 of the above units = \$2,550
• Returns on account: 75 of the above unsold units
The company president examined the computer-generated journal entries for these transactions and was confused by the absence of a Purchases account.
a. Duplicate the journal entries that would have prepared on the computer printout.
b. Calculate the balance in the firm’s Inventory account.
c. Briefly explain the absence of the Purchases account to the company president.

4. Inventory valuation methods: computations and concepts. Wave Riders Surfboard Company began business on January 1 of the current year. Purchases of surfboards were as follows:

1/3: Purchase 100 boards @ \$125
3/17: Sold 50 boards @ \$130
5/9: 5/9: 246 boards @140
7/3: 400 boards @ \$150
10/23: 74 boards @ \$160

Wave Riders sold 710 boards at an average price of \$250 per board. The company uses a periodic inventory system.

Instructions
a. Calculate cost of goods sold, ending inventory, and gross profit under each of the following inventory valuation methods:
• First-in, first-out
• Last-in, first-out
• Weighted average

b. Which of the three methods would be chosen if management’s goal is to
(1) produce an up-to-date inventory valuation on the balance sheet?
(2) approximate the physical flow of a sand and gravel dealer?
(3) report low earnings (for tax purposes) for a separate electronics company that has been experiencing declining purchase prices?

5. Depreciation methods. Betsy Ross Enterprises purchased a delivery van for \$30,000 in January 20X7. The van was estimated to have a service life of 5 years and a resid¬ual value of \$6,000. The company is planning to drive the van 20,000 miles annually. Compute depreciation expense for 20X8 by using each of the following methods:
a. Units-of-output, assuming 17,000 miles were driven during 20X8
b. Straight-line
c. Double-declining-balance
6. Depreciation computations. Alpha Alpha Alpha, a college fraternity, purchased a new heavy-duty washing machine on January 1, 20X3. The machine, which cost \$1,000, had an estimated residual value of \$100 and an estimated service life of 4 years (1,800 washing cycles). Calculate the following:
a. The machine’s book value on December 31, 20X5, assuming use of the straight-line depreciation method
b. Depreciation expense for 20X4, assuming use of the units-of-output depreciation method. Actual washing cycles in 20X4 totaled 500.
c. Accumulated depreciation on December 31, 20X5, assuming use of the double-declining-balance depreciation method.

7. Depreciation computations: change in estimate. Aussie Imports purchased a specialized piece of machinery for \$50,000 on January 1, 20X3. At the time of acquisition, the machine was estimated to have a service life of 5 years (25,000 operating hours) and a residual value of \$5,000. During the 5 years of operations (20X3 - 20X7), the machine was used for 5,100, 4,800, 3,200, 6,000, and 5,900 hours, respectively.
Instructions
a. Compute depreciation for 20X3 - 20X7 by using the following methods: straight line, units of output, and double-declining-balance.
b. On January 1, 20X5, management shortened the remaining service life of the machine to 20 months. Assuming use of the straight-line method, compute the company’s depreciation expense for 20X5.
c. Briefly describe what you would have done differently in part (a) if Aussie Imports had paid \$47,800 for the machinery rather than \$50,000 In addition, assume that the company incurred \$800 of freight charges \$1,400 for machine setup and testing, and \$300 for insurance during the first year of use.
Hi there,

Customer: replied 4 years ago.

Thanks. I will work on your assignment over the weekend :)
Customer: replied 4 years ago.

Thank you Steven!

Hi there,

I am working on this now and will have it for you soon.
Customer: replied 4 years ago.

thanks again

The top portion of #4 is unclear. First it says "Purchases of surfboards were as follows," but then it says "3/17: Sold 50 boards @ \$13." I'm going to proceed by ignoring the word "Sold."

Customer: replied 4 years ago.

that is fine

Hi again,

(3)(a)(i)
Dr. Inventory, \$2,000
Cr. Accounts Payable, \$2,000

(3)(a)(ii)
Dr. Accounts Receivable, \$2,550
Cr. Sales, \$2,550

Dr. Cost of Goods Sold, \$1,200*
Cr. Inventory, \$1,200
*300 units @ \$4

(3)(a)(iii)
Dr. Accounts Payable, \$300
Cr. Inventory, \$300*
*75 units @ \$4

(3)(b)
Inventory bal.: \$2,000 purchased – \$1,200 sold – \$300 returned = \$500

(3)(c)
The Purchases account is not used in a perpetual inventory system. Instead, all changes in inventory are debited or credited directly to the Inventory account to keep the inventory balance current at all times throughout the year.

====================

(4)(a)(i)
Cost of goods sold: (100 @ \$125) + (50 @ \$130) + (246 @ \$140) + (314 @ \$150) = \$100,540
Ending inventory: (86 @ \$150) + (74 @ \$160) = \$24,740
Gross profit: (710 @ \$250) – \$100,540 = \$76,960

(4)(a)(ii)
Cost of goods sold: (74 @ \$160) + (400 @ \$150) + (236 @ \$140) = \$104,880
Ending inventory: (10 @ \$140) + (50 @ \$130) + (100 @ 125) = \$20,400
Gross profit: (710 @ \$250) – \$104,880 = \$72,620

(4)(a)(iii)
Weighted average cost per board: [(100 @ \$125) + (50 @ \$130) + (246 @ \$140) + (400 @ \$150) + (74 @ \$160)] / 870 = \$144

Cost of goods sold: 710 @ \$144 = \$102,240
Ending inventory: 160 @ \$144 = \$23,040
Gross profit: (710 @ \$250) – \$102,240 = \$75,260

(4)(b)(1) FIFO, because the inventory items with the most recent purchase prices will remain in the Inventory account to be valued for the balance sheet.
(4)(b)(2) LIFO, because purchases are dropped off in front of the existing piles, from which sales are then collected.
(4)(b)(3) FIFO, because the older inventory items will have the higher costs, increasing COGS and decreasing earnings.

====================

(5)(a)
Depreciation per mile: (\$30,000 – \$6,000) / (5 × 20,000 miles) = \$0.24
Year 2 depreciation: 17,000 miles × \$0.24 = \$4,080

(5)(b)
Annual depreciation: (\$30,000 – \$6,000) / 5 years = \$4,800

(5)(c)
Year 1 depreciation: \$30,000 × 1/5 years × 200% = \$12,000
New asset book value: \$30,000 – \$12,000 = \$18,000
Year 2 depreciation: \$18,000 × 1/5 years × 200% = \$7,200

====================

(6)(a)
Annual depreciation: (\$1,000 – \$100) / 4 years = \$225
Asset book value, year 1: \$1,000 – \$225 = \$775
Asset book value, year 2: \$775 – \$225 = \$550
Asset book value, year 3: \$550 – \$225 = \$325

(6)(b)
Depreciation per washing cycle: (\$1,000 – \$100) / 1,800 cycles = \$0.50
Year 2 depreciation: 500 cycles × \$0.50 = \$250

(6)(c)
Year 1 depreciation: \$1,000 × 1/4 years × 200% = \$500
Year 2 depreciation: (\$1,000 – \$500) × 1/4 years × 200% = \$250
Year 3 depreciation: (\$500 – \$250) × 1/4 years × 200% = \$125
Accumulated depreciation, year 3: \$500 + \$250 + \$125 = \$875

====================

(7)(a)(i)
Annual depreciation: (\$50,000 – \$5,000) / 5 years = \$9,000

(7)(a)(ii)
Depreciation per operating hour: (\$50,000 – \$5,000) / 25,000 hours = \$1.80
Year 1 depreciation: 5,100 hours × \$1.80 = \$9,180
Year 2 depreciation: 4,800 hours × \$1.80 = \$8,640
Year 3 depreciation: 3,200 hours × \$1.80 = \$5,760
Year 4 depreciation: 6,000 hours × \$1.80 = \$10,800
Year 5 depreciation: 5,900 hours × \$1.80 = \$10,620

(7)(a)(iii)
Year 1 depreciation: \$50,000 × 1/5 years × 200% = \$20,000
Year 2 depreciation: (\$50,000 – \$20,000) × 1/5 years × 200% = \$12,000
Year 3 depreciation: (\$30,000 – \$12,000) × 1/5 years × 200% = \$7,200
Year 4 depreciation: (\$18,000 – \$7,200) × 1/5 years × 200% = \$4,320
Year 5 depreciation: (\$10,800 – \$4,320) × 1/5 years × 200% = \$2,592, but reduced to \$1,480 so as to reflect \$5,000 residual value

(7)(b)
Depreciable cost: \$50,000 – \$5,000 = \$45,000
Accumulated depreciation, year 2: \$9,000 + \$9,000 = \$18,000
Remaining depreciation: \$45,000 – \$18,000 = \$27,000
Year 3 depreciation: \$27,000 × 12/20 = \$16,200

(7)(c) First, the cost of insurance during the first year was not necessary to bring the machinery to its condition and location for use and, therefore, should be expensed. Second, the freight charges and the cost of machine setup and testing were necessary and should be capitalized. This brings the depreciable cost of the machinery back to \$50,000. Therefore, the depreciation per operation hour of \$1.80 would remain the same and so would the calculated depreciation expense for each year.