Sanchez Company engaged in the following transactions during Year 1: 1) Started

Question

Sanchez Company engaged in the following transactions during Year 1: 1) Started the business by issuing $13,700 of common stock for cash. 2) The company paid cash to purchase $8,200 of inventory. 3) The company sold inventory that cost $5,600 for $11,650 cash. 4) Operating expenses incurred and paid during the year, $5,100. Sanchez Company engaged in the following transactions during Year 2: 1) The company paid cash to purchase $12,000 of inventory. 2) The company sold inventory that cost $9,800 for $18,250 cash. 3) Operating expenses incurred and paid during the year, $6,100. Note: Sanchez uses the perpetual inventory system. What is the amount of inventory that will be shown on the balance sheet at December 31, Year 2?

Explanation / Answer

Note: As operating expenses (like payroll, commission, selling expenses) are not related to production, they are not considered for the calculation of cost of goods sold.

1 Following are the journal entries in the books of Sanchez Company for year 1 Inventory A/c Sr No. Particulars Debit Credit Particulars Dr. Particulars Cr $ $ $ $ 1 Cash A/c Dr     13,700.00 Cash A/c 8200 By Cost of Goods Sold A/c 5600 Common Stock A/c Cr     13,700.00 By Balance c/d 2600 (Being cash received against common shares) 8200 8200 2 Inventory A/c Dr       8,200.00 Cash A/c Cr       8,200.00 (Being cash paid for the purchase of Inventory) In the Books of Sanchez Company Balance Sheet 3 Cash A/c Dr     11,650.00 As at Year 1 Sales A/c Cr     11,650.00 (Being inventory sold for cash) Particulars $ 4 Cost of Inventory Sold A/c Dr       5,600.00 Inventory 2600 Inventory A/c Cr       5,600.00 (Being cost of inventory sold) 5 Operating Expenses A/c Dr       5,100.00 Cash A/c Cr       5,100.00 (Being operating expenses incurred and paid during the period) 2 Following are the journal entries in the books of Sanchez Company for year 2 Inventory A/c Sr No. Particulars Debit Credit Particulars Dr. Particulars Cr $ $ $ $ 1 Inventory A/c Dr     12,000.00 By Balance b/d 2600 By Cost of Goods Sold A/c 9800 Cash A/c Cr     12,000.00 Cash A/c 12000 By Balance c/d 4800 (Being cash paid for the purchase of Inventory) 14600 14600 2 Cash A/c Dr     18,250.00 Sales A/c Cr     18,250.00 (Being inventory sold for cash) In the Books of Sanchez Company Balance Sheet 3 Cost of Inventory Sold A/c Dr       9,800.00 As at Year 2 Inventory A/c Cr       9,800.00 (Being cost of inventory sold) Particulars $ 4 Operating Expenses A/c Dr       6,100.00 Inventory 4800 Cash A/c Cr       6,100.00 (Being operating expenses incurred and paid during the period)

Note: As operating expenses (like payroll, commission, selling expenses) are not related to production, they are not considered for the calculation of cost of goods sold.

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