Problem 6.7A Accrual Accounting, Cash Flow, and Fair Value (LO6-1, LO6-3, LO6-6)
ID: 2546774 • Letter: P
Question
Problem 6.7A Accrual Accounting, Cash Flow, and Fair Value (LO6-1, LO6-3, LO6-6) Thompson Plumbing Inc. is a wholesaler of plumbing accessories. Thompson Plumbing began operations in September of the current year and engaged in the following transactions during September and October of this year. Thompson Plumbing uses a perpetual inventory system. Sept.03 Purchased $240,000 of plumbing accessories, terms n/30. Sept.15 Sold $180,000 of plumbing accessories, terms n/60. The cost of the accessories sold is $120,000 Sept.28 Purchased $360,000 of plumbing accessories, terms n/45 Oct.03 Settled the $240,000 purchase of September 3 t of the accessories sold is $300,000. Oct.27 Purchased $540,000 of plumbing accessories, terms n/30. Required a. Compute the gross profit (loss) on Thompson Plumbing's transactions during September and October. b. Compute the gross profit (loss) on Thompson Plumbing's transactions during September and October if a cash-basis accounting system was used d. Assume that the fair value of Thompson Plumbing's inventory at October 31 is $900,000. A potential lender asks Thompson Plumbing to prepare a fair-value-based balance sheet. Prepare the journal entry to reflect inventory at fair value. Comment on howa wholesaler might determine fair value for inventory items. (Hint: Increase the Inventory account by the difference between fair value and book value with the offset to an account titled Revaluation of Inventory to Market Value)Explanation / Answer
a) Calculation of gross profit (loss) (Amounts in $)
b) Calculation of Gross profit/(Loss) on cash basis (Amounts in $)
d) Cost of Inventory on October 31 = Total purchases of sept and oct - cost of accessories sold
= $240,000+$360,000+$540,000-$120,000-$300,000 = $720,000
Journal entry to reflect the inventory at fair value (Amounts in $)
Particulars September October Total Sales 180,000 450,000 630,000 Less: Cost of accessories sold (120,000) (300,000) (420,000) Gross Profit/(Loss) 60,000 150,000 210,000