Evaluating Profitability Big Oak Lumber is a lumber yard on Angel Island. Some o

Question

Evaluating Profitability Big Oak Lumber is a lumber yard on Angel Island. Some of Big Oak's transactions during the current year are as follows: Apr. 15 Sold lumber on account to Hard Hat Construction, $19,700. The inventory subsidiary ledger shows the cost of this merchandise was $10,300. Apr. 19 Purchased lumber on account from LHP Company, $3,700. May 10 Collected in cash the $19,700 account receivable from Hard Hat Construction. May. 19 Paid the $3,700 owed to LHP Company. Dec. 31 Big Oak's personnel counted the inventory on hand and determined its cost to be $114,000. The accounting records, however, indicate inventory of $116,500 and a cost of goods sold of $721,000. The physical count of the inventory was observed by the company's auditors and is considered correct. Instructions Prepare journal entries to record these transactions and events in the accounting records of Big Oak Lumber. (The company uses a perpetual inventory system.) Prepare a partial income statement showing the company's gross profit for the year. (Net sales for the year amount to $1,422,000. Big Oak purchases merchandise inventory at the same wholesale prices as other lumber yards. Because of its remote location the company must pay between $8,000 and $18,000 per year in extra transportation charges to receive delivery of merchandise. (These additional charges are included in the amount shown as cost of goods sold.) Assume that an index of key business ratios in your library shows lumber yards of Big Oak's approximate size (in total assets) average net sales of $1 million per year and a gross profit rate of 22 percent. Is Big Oak able to pass its extra transportation costs on to its customers? Does the business appear to suffer or benefit financially from its remote location? Explain your reasoning and support your conclusions with specific accounting data comparing the operations of Big Oak Lumber with the industry averages.

Explanation / Answer

The Journal Entries are as follows

Income Statement of Big Oak for the year ended on 31st December

The remote Location of Big Oak is beneficial to Big Oak as He can sell the product at higher rate absorbing the additional cost of transportation. As we can see the Gross Profit Margin of Industry is around 22^% whereas the Gross Profit Margin of Big Oak is 49% which is way above the industry average.

Date Account & Explanation Debit($) Credit($) Apr-15 Hard Hat Construction $19,700 To Sales $19,700 (Being Sales of Lumber on account to Hard Hat Construction) Apr-15 Cost of Goods Sold 10,300 To Merchandise 10,300 (To record the cost of goods sold) Apr-19 Purchase 3700 To LHP company 3700 (To record purchase on account) Apr-10 Cash 19700 To Hard Hat Construction 19700 (To Record cash received from Hard Hat Construciton) May-19 LHP Company 3700 To Cash 3700 (To record Cash Payment to LHP Company)

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