Because Mei-ling has had such a successful first few months, she is considering
ID: 2727207 • Letter: B
Question
Because Mei-ling has had such a successful first few months, she is considering other opportunities to develop her business. One opportunity is the sale of fine European mixers. The owner of Kzinski Supply Co. has approached Mei-ling to become the exclusive distributor of these fine mixers in her state. The current cost of a mixer is approximately NT$575, and Mei-ling would sell each one for NT$1,150. Mei-ling comes to you for advice on how to account for these mixers.
Mei-ling asks you the following questions.
1. “Would you consider these mixers to be inventory or should they be classified as supplies or equipment?”
2. “I’ve learned a little about keeping track of inventory using both the perpetual and the periodic systems of accounting for inventory. Which system do you think is better? Which one would you recommend for the type of inventory that I want to sell?”
3. “How often do I need to count inventory if I maintain it using the perpetual system? Do I need to count inventory at all?”
In the end, Mei-ling decides to use the perpetual inventory system. The following transactions happen during the month of January.
Jan. 4 Bought five deluxe mixers on account from Kzinski Supply Co. for NT$2,875, FOB shipping point, terms n/30.
6 Paid NT$100 freight on the January 4 purchase.
7 Returned one of the mixers to Kzinski because it was damaged during shipping. Kzinski issues Matcha Creations credit for the cost of mixer plus NT$20 for the cost of freight that was paid on January 6 for one mixer.
8 Collected NT$375 of the accounts receivable from December 2017.
12 Three deluxe mixers are sold on account for NT$3,450, FOB destination, terms n/30. (Cost of goods sold is NT$595 per mixer.)
14 Paid the NT$75 of delivery charges for the three mixers that were sold on January 12.
14 Bought four deluxe mixers on account from Kzinski Supply Co. for NT$2,300, FOB shipping point, terms n/30.
Jan. 17 Mei-ling is concerned that there is not enough cash available to pay for all of the mixers purchased. She invests an additional NT$1,000 cash in Matcha Creations in exchange for ordinary shares.
18 Paid NT$80 freight on the January 14 purchase.
20 Sold two deluxe mixers for NT$2,300 cash. (Cost of goods sold is NT$595 per mixer.)
28 Mei-ling issued a check to her assistant for all the help the assistant has given her during the month. Her assistant worked 20 hours in January and is also paid the NT$56 owed at December 31, 2017. (Mei-ling’s assistant earns NT$8 an hour.)
28 Collected the amounts due from customers for the January 12 transaction.
30 Paid a NT$145 utility bill (NT$75 for the December 2017 accounts payable and NT$70 for the month of January).
31 Paid Kzinski all amounts due.
31 Cash dividends of NT$750 are paid.
As of January 31, the following adjusting entry data is available.
1. A count of baking supplies reveals that none were used in January.
2. Another month’s worth of depreciation needs to be recorded on the NT$1,200 of baking equipment bought in November. (Recall that the baking equipment has a useful life of 5 years or 60 months and no salvage value.)
3. An additional month’s worth of interest on her grandmother’s NT$2,000 loan needs to be accrued. (The interest rate is 6%.)
4. During the month, NT$110 of insurance has expired.
5. An analysis of the unearned service revenue account reveals that Mei-ling has not had time to teach any of these lessons this month because she has been so busy selling mixers. As a result, there is no change to the unearned service revenue account. Mei-ling hopes to complete the remaining lessons in February.
6. An inventory count of mixers at the end of January reveals that Mei-ling has three mixers remaining.
MC5 (Continued)
The post-closing trial balance from December 31, 2017 is shown below.
MATCHA CREATIONS
Post-Closing Trial Balance
December 31, 2017
Account Debit Credit
Cash........................................................................ NT$1,180
Accounts Receivable............................................. 875
Supplies.................................................................. 350
Prepaid Insurance ................................................................................ 1,210
Equipment ................................................................................ 1,200
Accumulated Depreciation- Equipment.............................................................. NT$ 40
Accounts Payable................................................................... 75
Salaries Payable................................................................... 56
Unearned Service Revenue.................................................................. 300
Interest Payable................................................................... 15
Note Payable................................................................... 2,000
Share Capital—Ordinary.................................................................. 800
Retained Earnings................................................................. 1,529
NT$4,815 NT$4,815
Instructions
Using the information from previous chapters and the new information above, do the following.
(a) Answer Mei-ling’s questions.
(b) Prepare and post the January 2018 transactions.
(c) Prepare a trial balance.
(d) Prepare and post the adjusting journal entries required.
(e) Prepare an adjusted trial balance.
(f) Prepare a multiple-step income statement for the month ended January 31, 2018.
Explanation / Answer
Answer a:
1. “Would you consider these mixers to be inventory or should they be classified as supplies or equipment?”
Answer: Mixers should be considered as inventory only because it is being kept for sale in normal transaction of business.
2. “I’ve learned a little about keeping track of inventory using both the perpetual and the periodic systems of accounting for inventory. Which system do you think is better? Which one would you recommend for the type of inventory that I want to sell?”
Answer: Perpetual system of accounting is better than periodic accounting system because perpetual system of accounting provides more accurate & real time inventory information. Perpetual inventory accounting method also helps in gaining more control on inventory by providing real time information.
For Mei-ling's also perpetual inventory accounting will be more useful due to above mentioned benefits of perpetual method of accounting method.
3. “How often do I need to count inventory if I maintain it using the perpetual system? Do I need to count inventory at all?”
Answer: In case of perpetual method of system with the help of software you can manage records of inventory accurately and in real time. With the help of real time data you can count inventory as per the requirement of your organization and efficiency of controls implemented in your organization. You need to count inventory very frequently for particular item of inventory, you can create some rules for inventory counting, which means you should count high value inventory more frequently than low value inventory.
Answer b:
Date Particular Debit Credit Jan 4 Inventory 2,875Kzinski Supply Co 2,875 (inventory purchased from Kzinski Co.) Jan 6 Inventory 100 cash 100 (freight cost paid) Jan 7 Kzinski supply Co. 595 Inventory (per unit cost of mixer 2875/5 = 575 + 20 freight cost = 595) 595 Jan 8 Cash 375 Account receivable 375 (account receivable amount collected) Jan 12 Account receivable 3450 revenue 3450 (3 mixers sold on credit) Jan 12 Cost of goods sold 1785 Inventory 1785 (3 mixer's cost charged against cost of goods sold) Jan 14 Delivery charges 75 cash 75 (delivery charges paid in cash) Jan 14 Inventory 2300 Kzinski supplies co. 2300 (mixers purchased from Kzinski supplies co) Jan 17 Cash 1000 share capital 1000 (amount invested in ordinary share capital) Jan 18 Delivery charges 85 Cash 85 (delivery charges paid in cash) Jan 20 cash 2300 revenue 2300 (two mixers sold in cash) Jan 20 Cost of goods sold 1190 inventory 1190 (cost of 2 mixers charged to cost of goods sold) Jan 21 Salary payable 56 salary expense 160 to cash 216 (salary & past dues paid to assistant) Jan 28 cash 3450 account receivable 3450 (amount received from account receivable) Jan 30 Account payable 75 Utility bills expense 70 cash 145 (utility expense paid in cash) Jan 31 Kzinski supplies co. 4580 cash 4580 (amount due to kzinski paid in cash) Jan 31 Dividend 750 cash 750 (dividend paid in cash)
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