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:

October $5$ Purchased $15$ batteries at a cost of $$17,020$ each.

October $14$ Sold $18$ batteries at $$22,250$ per battery

October $22$ Purchased $24$ batteries at a cost of $$18,175$ each but the supplier gave a $4\%$ quantity

discount.

November $10$ Sold $15$ batteries to Sammy$$s Auto Ltd and $10$ batteries to Chill$$s Auto Detailing at a

price of $$23,990$ each.

November $12$ 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 $27$ Sold $23$ batteries which yielded total sales revenue of $$576,840.(8$ of these batteries

were sold on account to Sassy Motors & Auto Accessories a longstanding customer$)$

November $30$ 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 $2$ In preparation for the festive season, Necks purchased $25$ batteries at a total cost of

$$474,500.$

December $155$ of the batteries purchased on December $2$ were returned to the supplier, as the poles

were either corroded or otherwise badly damaged.

December $30$ Sold $22$ batteries to two customers $($XL Traders & Sassy Motors Auto Accessories$)$ at a

selling price of $$26,950$ each.

December $31$ 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$)$