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Vibrant Company had $850,000 of sales in each of three consecutive years 2014–2016, and it purchased merchandise costing $500,000 in each of those years. It also maintained a $250,000 physical inventory from the beginning to the end of that three-year period. In accounting for inventory, it made an error at the end of year 2014 that caused its year-end 2014 inventory to appear on its statements as $230,000 rather than the correct $250,000. 1. Determine the correct amount of the company’s gross profit in each of the years 2014–2016. 2. Prepare comparative income statements as in Exhibit 6.11 to show the effect of this error on the company’s cost of goods sold and gross profit for each of the years 2014–2016.

 

 

Use the following information for Palmer Co. to compute inventory turnover for 2015 and 2014, and its days’ sales in inventory at December 31, 2015 and 2014. (Round answers to one decimal.) Comment on Palmer’s efficiency in using its assets to increase sales from 2014 to 2015.

 

 

      2015 2014 2013  
Cost of goods sold . . . . . . . . .      $643,825      $426,650       $391,300 
Ending inventory . . . . . . . . . . .     97,400        87,750         92,500  

 

 

QP Corp. sold 4,000 units of its product at $50 per unit in year 2015 and incurred operating expenses of $5 per unit in selling the units.          
 It began the year with 700 units in inventory and made successive purchases of its product as follows.                
                                   
Jan.   1 Beginning inventory   . . . . . . . .  700 units @ $18.00 per unit                       
Feb. 20 Purchase  . . . . . . . . . . . . . . . . .  1,700 units @ $19.00 per unit                       
May 16 Purchase  . . . . . . . . . . . . . . . . .  800 units @ $20.00 per unit                       
Oct.  3 Purchase  . . . . . . . . . . . . . . . . .  500 units @ $21.00 per unit                       
Dec. 11 Purchase  . . . . . . . . . . . . . . . . .  2,300 units @ $22.00 per unit                       
Total . . . . . . . . . . . . . . . . . . . .  6,000 units                            
                                   
Required 1. Prepare comparative income statements similar to Exhibit 6.8 for the three inventory costing methods of FIFO, LIFO, and weighted average. (Round all amounts to cents.)
 Include a detailed cost of goods sold section as part of each statement. The company uses a periodic inventory system, and its income tax rate is 40%.       

 

2. How would the financial results from using the three alternative inventory costing methods change if the company had been experiencing declining costs in its purchases of inventory?

 

 3. What advantages and disadvantages are offered by using (a) LIFO and (b) FIFO? Assume the continuing trend of increasing costs.

 

 

PART II (Modules 3 and 4)                      
                           
Scenario: On October 1, 2015, Santana Rey launched a computer services company called Business Solutions, which provides consulting services, computer system installations, and custom program development.  Rey adopts the calendar year for reporting purposes and expects to prepare the company’s first set of financial statements on December 31, 2015.  The company’s initial chart of accounts follows.    
   
   
                           
  Account   No. Account   No.              
  Cash   101 S. Rey, Capital   301              
  Accounts Receivable   106 S. Rey, Withdrawals   302              
  Computer Supplies   126 Computer Services Revenue   403              
  Prepaid Insurance   128 Wages Expense   623              
  Prepaid Rent    131 Advertising Expense   655              
  Office Equipment   163 Mileage Expense   676              
  Computer Equipment   167 Miscellaneous Expenses   677              
  Accounts Payable   201 Repairs Expense —  Computer   684              
                           
  1. Prepare journal entries to record each of the following transactions for Business Solutions.        
                           
  Oct. 1 S. Rey invested $45,000 cash, a $20,000 computer system, and $8,000 of office equipment in the company.                    
    2 The company paid $3,300 cash for four months’ rent. (Hint: Debit Prepaid Rent for $3,300.)                    
    3 The company purchased $1,420 of computer suppies on credit from Harris Office Products.                    
    4 The company paid $2,220 cash for one year’s premium on a property and liability insurance policy. (Hint: Debit Prepaid Insurance for $2,220.)                    
    6 The company billed Easy Leasing $4,800 for services performed in installing a new web server.                    
    8 The company paid $1,420 cash for the computer supplies purchased from Harris Office Products on October 3.                    
    10 The company hired Lyn Addie as a part-time assistant for $125 per day, as needed.                    
    12 The company billed Easy Leasing another $1,400 for services performed.                    
    15 The company received $4,800 cash from Easy Leasing as partial payment on its account.                    
    17 The company paid $805 cash to repair computer equipment that was damaged when moving it.                    
    20 The company paid $1,728 cash for advertisements published in the local newspaper.                    
    22 The company received $1,400 cash from Easy Leasing on its account.                    
    28 The company billed IFM Company $5,208 for services performed.                    
    31 The company paid $875 cash for Lyn Addie’s wages for seven days’ work.                    
    31 S. Rey withdrew $3,600 cash from the company for personal use.                    
  Nov. 1 The company reimbursed S. Rey in cash for business automobile mileage allowance (Rey logged 1,000 miles at $0.32 per mile).                    
    2 The company received $4,633 cash from Liu Corporation for computer services performed.                    
    5 The company purchased computer supplies for $1,125 cash from Harris Office Products.                    
    8 The company billed Gomez Co. $5,668 for services performed.                    
    13 The company received notification from Alex’s Engineering Co. that Business Solutions’ bid of $3,950 for an upcoming project is accepted.                    
    18 The company received $2,208 cash from IFM Company as partial payment of the October 28 bill.                    
    22 The company donated $250 cash to the United Way in the company’s name.                    
    24 The company completed work for Alex’s Engineering Co. and sent it a bill for $3,950.                    
    25 The company sent another bill to IFM Company for the past-due amount of $3,000.                    
    28 The company reimbursed S. Rey in cash for business automobile mileage (1,200 miles at $0.32 per mile).                    
    30 The company paid $1,750 cash for Lyn Addie’s wages for 14 days’ work.                    
    30 S. Rey withdrew $2,000 cash from the company for personal use.                    
                           
  2. Open ledger accounts (in balance column format) and post the journal entries from part 1 to them.      
                           
  3. Prepair trial balance                    
                           
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