Assessment #$1\_$cost Classification $\_$Inventory valuation

Question $2$

$(35$ marks$)$

Necks Auto are retailers who purchase and sell vehicle parts & accessories, including batteries. The business uses a perpetual inventory system and began the last quarter of $2020$ with merchandise inventory of $10$ batteries of the "NeverDie" brand at a total cost of $$168,200.$

The following transactions, relating to the "NeverDie" brand were completed during the quarter:

$\backslash$table$[[$October $5,$Purchased $15$ batteries at a cost of $$17,020$ each.$],[$October $14,$Sold $18$ batteries at $$22,250$ per battery$],[$October $22,\backslash$table$[[$Purchased $24$ batteries at a cost of $$18,175$ each but the supplier gave a $4\%$ quantity$],[$discount$.]]],[$November $10,\backslash$table$[[$Sold $15$ batteries to Sammy's Auto Ltd and $10$ batteries to Chill's Auto Detailing at a$],[$price of $$23,990$ each.$]]],[$November $12,\backslash$table$[[$Owing to an increased demand for this brand of batteries, $30$ batteries were purchased on$],[$account at a cost of $$17,612$ each. In addition, Necks Auto paid $$288$ in cash on each$],[$battery to have the inventory shipped from the vendor's warehouse to their location.$]]],[$November $27,\backslash$table$[[$Sold $23$ batteries which yielded total sales revenue of $$576,840\mathrm{.}18$ of these batteries$],[$were sold on account to Sassy Motors & Auto Accessories a longstanding customer$)]]],[$Dovember $30,\backslash$table$[[$A customer, to whom $5$ batteries were sold at the end of the business day on November$],[27,$ returned $2$ units, as they were of the "Bongtolast" brand.$]]],[$December $15,\backslash$table$[[$In preparation for the festive season, Necks purchased $25$ batteries at a total cost of$],[$$$474,500.]]],[$December $30,\backslash$table$[[5$ of the batteries purchased on December $2$ were returned to the supplier, as the poles$],[$were either corroded or otherwise badly damaged.$]]],[$December $31,\backslash$table$[[$Sold $22$ batteries to two customers $($XL Traders & Sassy Motors Auto Accessories$)$ at a$],[$selling price of $$26,950$ each.$]]],[\backslash$table$[[$An actual count of inventory was carried out which revealed that there were $9$ units of$],[$the "NeverDie" brand in the warehouse.$]],]]$

All purchases were on account and received on the dates stated.

Required:

a$)$ Prepare a perpetual inventory record for Necks Auto, using the first in$,$ first out $($FIFO$)$ method of inventory valuation to determine the value of ending inventory at December $31,2020,$ and the total amount to be assigned to cost of goods sold for the period.

$(20$ marks$)$

b$)$ Given that selling, distribution and administrative costs associated with the NeverDie brand of batteries for the quarter were $$23,445,$$$10,250$ and $$75,435$ respectively, prepare an income statement for Necks Auto $($NeverDie$)$ for the quarter ended December $31,2020,$ to determine the net profit for the quarter.

$(6$ marks$)$

c$)$ Journalize the transactions on November $12$ and November $27,$ assuming the freight was paid by cash and the business uses a: $-$ Periodic inventory system.

$-,$ Perpetual inventory system

$(7$ marks$)$

d$)$ Explain the difference between a product cost and a period cost. How does the product cost of a manufacturer differ from the product cost of a merchandiser?

$(2$ marks$)$