Saranac Bike Co. started 2015 with $94,000 of merchandise inventory on hand. Dur

Question

Saranac Bike Co. started 2015 with $94,000 of merchandise inventory on hand. During 2015, $400,000 in merchandise was purchased on account with credit terms of 1/15, n/45. All discounts were taken. Purchases were all made f.o.b. shipping point. Saranac paid freight charges of $7,500. Merchandise with an invoice amount of $5,000 was returned for credit. Cost of goods sold for the year was $380,000. Saranac uses a perpetual inventory system. What is ending inventory, assuming Saranac uses the gross method to record purchases?

Explanation / Answer

Under the gross method the purchase will be recorded at its full value. That is inventory will be debited by $400000 and accounts payable will be credited by $400000. The discount received on paying the due amount within 15 days will have no effect on the cost of inventory.

Valuation of Closing inventory:

cost of ending inventory ($) beginning inventory 94000 Add: Purchase 400000 Add: freight in 7500 407500 Less: return -5000    Net purchase 402500 Cost of the goods available for sale 496500 Less: cost of goods sold -380000 Cost of ending inventory 116500

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