CASE STUDY: COUNTRY ROAD GIFT IDEAS. COUNTRY ROAD Gift Ideas began 2014 with 60,
ID: 2450702 • Letter: C
Question
CASE STUDY: COUNTRY ROAD GIFT IDEAS. COUNTRY ROAD Gift Ideas began 2014 with 60,000 units of inventory that cost $36,000. During 2014, Country Road purchased merchandise on account for $352,500 as follows: Purchase 1 (100,000 units costing) $ 65,000 Purchase 2 (270,000 units costing) 175,500 Purchase 3 (160,000 units costing) 112,000 Cash payments on account totaled $326,000 during the year. COUNTRY ROAD sales during 2014 consisted of 520,000 units of inventory for $660,000, all on account. The company uses the FIFO inventory method. Cash collections from customers were $630,000. Operating expenses totaled $240,500, of which COUNTRY ROAD paid $211,000 in cash. COUNTRY ROAD accrued income tax expense at the rate 0f 35% of income before tax. REQUIREMENTS. 1. Make summary journal entries to record COUNTRY ROAD transactions for the year, assuming the company uses a perpetual inventory system. 2. Determine the FIFO cost of COUNTRY ROAD ending inventory at December, 31, 2014 in two ways: a. Use a T-account b. Multiply the number of units on hand by the unit cost 3. Show how COUNTRY ROAD would compute cost of goods sold for 2014. Follow the FIFO example earlier in the chapter. 4. Prepare COUNTRY ROAD income statement for 2014. Show totals for the gross profit and income before tax. 5. Determine COUNTRY ROAD gross profit percentage, rate of inventory turnover, and net income as a percentage of sales for the year. In COUNTRY ROAD industry, a gross profit percentage of 40%, an inventory turnover six times per year, and a net income percentage of 7% are considered excellent. How well does COUNTRY ROAD compare to the industry averages?
Explanation / Answer
Calculation of Closing Inventory as per FIFO Method Closing Inventory in Units = Op. Inventory in Units + Purchases in Units - Sales In Units Closing Inventory in Units = 60000 + 530000 - 520000 = 70000 Units Value of Closing inventory = 70000 Units @ $0.70 (Purchases -3) = $49000 Calculation of Cost of Goods Sold Particulars Units Amt Per Unit Total Opening Stock 60000 0.6 $36,000 Add: Purchases Purchases -1 100000 0.65 $65,000 Purchases - 2 270000 0.65 $175,500 Purchases - 3 160000 0.7 $112,000 Total purchases 530000 352500 Less : Closing Stock 70000 0.7 49000 Cost of Goods Sold 520000 0.65 339500 Income Statement Particulars Units Amt Per Unit Total Sales 520000 1.27 $660,000 Less: Cost of Goods Sold 520000 0.65 339500 Gross Profit $320,500 Less: Operating expenses $240,500 Net Profit $80,000 Less: Income Tax (35%) $28,000 Net Profit After Tax $52,000 Journal Entry Particulars Dr Amt Cr Amt Purchases A/c Dr. $65,000 To Accounts Payable A/c $65,000 (Goods Purchased -1 ) Purchases A/c Dr. $175,500 To Accounts Payable A/c $175,500 (Goods Purchased -2 ) Purchases A/c Dr. $112,000 To Accounts Payable A/c $112,000 (Goods Purchased -3 ) Accounts Receivables A/c Dr. $660,000 Cost of Goods Sold A/c Dr. $339,500 To Sales A/c $660,000 To inventory A/c $339,500 (Goods sold on credit) Accounts Payable A/c Dr. $326,000 To Cash A/c $326,000 (Cash paid to creditors) Cash A/c Dr. $630,000 To Accounts Receivables $630,000 (Cash Recd from debtors) Operating expenses A/c Dr. $240,500 To Cash A/c $211,000 To Operating exp. Payable A/c $29,500 (operating expenses during the year) Income Tax A/c Dr. $28,000 To Income Tax Payable A/c $28,000 (I tax due during the year Gross profit Ratio = (Gross Profit / Sales) X 100 Gross profit Ratio = ($320500 / $660000) X 100 = 48.56% Inventory Turnover Ratio = Net Credit Sales / Avg Inventory Avg Inventory = ($36000 +$49000)/2 = $42500 Inventory Turnover Ratio = 660000 / 42500 = 15.53 times Net Income Ratio = (net Income After Tax / Net Sales) X 100 Net Income Ratio = (52000 / 660000) X 100 = 7.88% Comparision of ratio Country Road Co. Avg Gross Profit Ratio 48.56% 40% Inventory turnover Ratio 15.53 Times 6 times Net profit Ratio 7.88% 7%
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