On December 1, 2020, Cambridge Printers had the account balances shown below.

	Debit		Credit
Cash	£ 14,650	Accumulated Depreciation—Equipment	£ 1,500
Accounts Receivable	3,900	Accounts Payable	3,000
Inventory	1,950*	Share Capital—Ordinary	20,000
Equipment	21,000	Retained Earnings	7,000
		Loan Payable	10,000
	£41,500		£41,500

 

 

 

 

 

 

 

 

 

 

^*(3,000 × £0.65)

The following transactions occurred during December.

Dec.  3	Purchased 4,000 units of inventory on account at a cost of £0.72 per unit.
5	Sold 4,400 units of inventory on account for £0.92 per unit. (It sold 3,000 of the £0.65 units and 1,400 of the £0.72.)
7	Granted the December 5 customer £184 credit for 200 units of inventory returned costing £144. These units were returned to inventory.
17	Purchased 2,200 units of inventory for cash at £0.78 each.
22	Sold 2,000 units of inventory on account for £0.95 per unit. (It sold 2,000 of the £0.72 units.)

Adjustment data:

• 1. Accrued salaries payable £400.
• 2. Depreciation £200 per month.
• 3. Loan Payable has an annual interest rate of 12%;
• 4. Income Taxes are estimated at 30% of pre-tax profit. 
• 5. The following additional accounts are available:  Interest Expense; Interest Payable; Income Tax Expense; and Income Tax Payable.

Instructions

a. Journalize the December transactions and adjusting entries, assuming Cambridge uses the perpetual inventory method.

b. Enter the December 1 balances in the ledger T‐accounts and post the December transactions. In addition to the accounts mentioned above, use the following additional accounts: Cost of Goods Sold, Depreciation Expense, Salaries and Wages Expense, Salaries and Wages Payable, Sales Revenue, and Sales Returns and Allowances. (The “T” accounts are needed just to calculate the ending account balances.  The form does not matter.  Also, you need not X ref either in the “T” accounts or in the journal.)

c. Prepare an adjusted trial balance as of December 31, 2020.

d. Prepare a SOCI and Balance Sheet

e. Compute ending inventory and cost of goods sold under FIFO, assuming Cambridge uses the periodic inventory system.

f. Compute ending inventory and cost of goods sold under average‐cost, assuming Cambridge uses the periodic inventory system.

g. Assume the balance for Inventory on January 1, 2020, was £1,200.  Also, assume that all sales during the year were on credit, terms n/30, as per industry standard, and that the average monthly sales for 2020 were approximately the same as for December 2020.  Calculate the approximate inventory turnover and days in inventory for 2020 using the SOCI from part d., and draw a conclusion whether this is favourable or not.  Explain your answer.