LO$6-1,$ LO$6-3,$ LO$6-6$

PROBLEM $6\mathrm{.}7$B

Accrual Accounting. Cash

Flow, and Fair Value

Computer Resources Inc. is a computer retailer. Computer Resources began operations in Decem$-$

ber of the current year and engaged in the following transactions during that month. Computer

Resources uses a perpetual inventory system.

Dee. $5$ Purchased $$100,000$ of computer equipment, terms $\frac{n}{30}.$

Dec. $12$ Sold $$100,000$ of computer equipment, terms $\frac{n}{30}.$ The cost of the equipment sold is

$$50,000.$

Dec. $26$ Purchased $$200,000$ of computer equipment, terms $\frac{n}{30}.$

Instructions

a$.$ Compute the gross profit on Computer Resources's transactions during December.

b$.$ Compute the gross profit on Computer Resources's transactions during December if a cash$-$

basis accounting system was used.

c$.$ Explain the difference between the results in a and b$.$

d$.$ Assume that the fair value of Computer Resources's inventory at December $31$ is $$375,000.$

A potential lender asks Computer Resources to prepare a fair$-$value based balance sheet. Pre$-$

pare the journal entry to reflect inventory at fair value. Comment on how a retailer might

determine fair value for inventory items. $[$Hint: Increase the Inventory account by the dif$-$

ference between fair value and book value with the offset to an account titled Revaluation of

Inventory to Market Value.$]$