Gamit Ltd. completed the following selected (and summarized) transactions during 20X5:
a. Merchandise inventory on hand 1 January 20X5, $ 105,000 ( at cost, which was the same as lower of cost or NRV).
b. During the year, purchased merchandise for resale at cost of $ 200,000 on credit, terms 2/ 10, n/ 30. Immediately paid 85% of the cash cost.
c. Paid freight on merchandise purchased, $ 10,000 cash.
d. Paid 40% of the accounts payable within the discount period. The remaining payables were unpaid at the end of 20X5 and were still within the discount period.
e. Merchandise that had a quoted price of $ 3,000 (terms 2/ 10, n/ 30) was returned to a supplier. A cash refund of $ 2,940 was received because the items were unsatisfactory.
f. During the year, sold merchandise for $ 370,000, of which 10% was on credit.
g. A television set caught fire and was damaged internally; it was returned by the customer. The set was originally sold for $ 600, of which $ 400 cash was refunded. The set originally cost the company $ 420. Estimates are that the set, when repaired, can be sold for $ 240. Estimated repair costs are $ 50, and selling costs are estimated to be $ 10.
h. Operating expenses (administrative and distribution) paid in cash, $ 120,000; includes the $ 10 ( in thousands).
i. Excluded from the purchase given in (b) and from the ending inventory was a shipment for $ 7,000 ( net of discount). This shipment was in transit, FOB shipping point at 31 December 20X5. The invoice had arrived.
j. Paid $ 50 cash to repair the damaged television set; see (g) above.
k. Sold the damaged television set for $ 245; selling costs allocated, $ 10.
l. The ending inventory (as counted) was $ 110,000 at cost, and $ 107,000 at NRV. Assume an average income tax rate of 40%.
Accounting policies followed by the company are as follows:
(1) The annual accounting period ends 31 December.
(2) A periodic inventory system is used.
(3) Purchases and accounts payable are recorded net of cash discounts.
(4) Freight charges are allocated to merchandise when purchased.
(5) All cash discounts are taken.
(6) Used and damaged merchandise is carried in a separate inventory account.
(7) Inventories are reported at lower of cost or NRV, and the allowance method is used.

1. Give the entries for transactions (b) through (k).
2. Give the end- of- period adjusting entries.
3. Prepare a multiple- step income statement for 20X5. Assume that 20,000 common shares are outstanding.
4. Show how the ending inventory should be reported on the SFP at 31 December 20X5.

  • CreatedFebruary 17, 2015
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