Mini-Project #5 Inventory STUDENT ROLE: You are employed with Johnson Accounting
ID: 2563636 • Letter: M
Question
Mini-Project #5 Inventory STUDENT ROLE: You are employed with Johnson Accounting Firm as an entry-level accountant. Today you have been assigned to work with Spare Parts, Inc. to help answer some of their inventory questions CLIENT PROFILE: Spare Parts, Inc. is a regional retail chain that sells repair parts for vehicles, tractors and yard equipment. They have been in business since 2010, and are a publicly traded company. Spare Parts, Inc recently hired a new CEO and he is reviewing the accounting practices related to Inventory His company currently uses LIFO for tax reporting and financial reporting and wants to understand the impact of switching to FIFO for financial reporting. The company uses a periodic inventory method, and has a 239% taxrate. The client has 80,000 shares of common stock outstanding, with a par.value of $0.50 ASSIGNMENT: To help him make this decision, your supervisor has asked you to complete several tasks In Blackboard you have been provided a PURCHASE AND SALES DATA table, with two scenarios. Under Scenario #1, purchase prices are increasing. In Scenario 112, purchase prices are decreasing. You have also been provided with a Trial Balance for December 31, 2016. All account balances are current and adjusted except for the Inventory account and Cost of Goods Sold, which are at beginning balances. Because the company uses the periodic method, these accounts have not been adjusted yet. SCENARIO #1 CALCULATIONS Task 1: Using the PURCHASE AND SALES DATA table and TRIAL BALANCE for Scenario #1: Apply the FIFQ method to calculate Ending Inventory and Cost of Goods Sold for Scenario #1. Show your work in either Excel or word. Prepare the year-end adjusting entry to record Inventory and Cost of Goods Sold for both scenarios. HINT: Beginning Inventory is $20,000. The PURCHASE account does have a balance, but the company did not have any purchase returns, purchase discounts or freight- in. Prepare a Multiple-Step Income Step and a Balance Sheet for both scenarios. The client has a 28% tax rate. . . Task 2: Using the PURCHASE AND SALES DATA table and TRIAL BALANCE for Scenario #1: .Apply the LIFQ method to calculate Ending Inventory and Cost of Goods Sold for Scenario #1. Show your work in either Excel or Word. Prepare the year-end adjusting entry to record Inventory and Cost of Goods Sold for both scenarios. HINT: Beginning Inventory is $20,000. The PURCHASE account does have a balance, but the company did not have any purchase returns, purchase discounts or freight- in. . Prepare a Multiple-Step Income Step and a Balance Sheet for both scenarios. The client has a 28% tax rate. * (continue to next page...)Explanation / Answer
Answer 1 - Task 1. FIFO Method Cost of Goods Available for Sale Date Explanation Units Unit Cost Total Cost 1-Jan Op. Inventory 1,000 20.00 20,000 1-May Purchases 2,000 23.00 46,000 2-Nov Purchases 1,950 24.00 46,800 Total 4,950 112,800 Ending Inventory (In Units) = 4,950 Units - 4,170 Units = 780 Units Value of Ending Inventory Date Units Unit Cost Total Cost Nov-17 780 24.00 18,720 Total 780 18,720 Cost of Goods Sold: Cost of Goods available for sale 112,800 Less: Ending Inventory 18,720 Cost of Goods Sold 94,080 Answer 2 - Task 1. Journal Entry Date Particulars Dr. Amt. Cr. Amt. 1 Inventory (Ending Bal.) Dr. 18,720.00 Cost of Goods Sold Dr. 94,080.00 To Purchases 92,800.00 To Inventory (Beginnng Balance) 20,000.00 (Record the Adjusting Entry for Cost of Goods Sold & Ending Inventory) Answer 3 - Task 1. Spare Parts Inc. Income Statement For the year Ended Dec 31, 2016 Sales Revenue Sales 980,000.00 Less: Cost of Goods Sold 94,080.00 Gross Margin 885,920.00 Operating Expenses Selling & Admn. Expenes Rent Expenses 16,000.00 Insurance Expenses 5,000.00 Salaries & Wages Expenses 80,000.00 Supplies Expenses 8,000.00 Utilities Expenses 6,000.00 Depreciation expenses 2,500.00 Phone / Internet Expense 1,200.00 Advertising Expense 16,000.00 134,700.00 Net Operating Income 751,220.00 Other Income & Losses Interest Expense 250.00 Net Income (Loss) 750,970.00 Income Tax - 28% 210,271.60 Net Income 540,698.40 Spare Parts Inc. Retained Earning Statement For the year Ended Dec 31, 2016 Beginning Balance 48,650.00 Net Income (Loss) 540,698.40 Sub-total 589,348.40 Dividends 10,000.00 Ending Balance 579,348.40 Answer 3. Spare Parts Inc. Balance Sheet For the year Ended Dec 31, 2016 Assets Current Assets Cash 450,000.00 Accounts Receivable 28,000.00 Inventory 18,720.00 Supplies 12,000.00 508,720.00 Property, Plant & Equipment Equipment 352,000.00 Accumulated Depreciation (10,000.00) 342,000.00 Total Assets 850,720.00 Liabilities & Stockholders' Equity Liabilities Current Liabilities Accounts Payable 1,000.00 Interest Payable 450.00 Salaries & Wages Payable 4,500.00 Income Tax Payable 210,271.60 Utilities Payable 150.00 216,371.60 Long Term Liabilities Notes Payable 5,000.00 Total Liabilities 221,371.60 Stockholders' Equity Common Stock 40,000.00 Paid in Capital in Excess of Par 10,000.00 Paid Up Capital 50,000.00 Retained Earnings 579,348.40 Total Stockholders' Equity 629,348.40 Total Laibilities & Stockholders' Equity 850,720.00 Answer 1 - Task 2. LIFO Method Cost of Goods Available for Sale Date Explanation Units Unit Cost Total Cost 1-Jan Op. Inventory 1,000 20.00 20,000 1-May Purchases 2,000 23.00 46,000 2-Nov Purchases 1,950 24.00 46,800 Total 4,950 112,800 Ending Inventory (In Units) = 4,950 Units - 4,170 Units = 780 Units Value of Ending Inventory Date Units Unit Cost Total Cost Jan-17 780 20.00 15,600 Total 780 15,600 Cost of Goods Sold: Cost of Goods available for sale 112,800 Less: Ending Inventory 15,600 Cost of Goods Sold 97,200 Answer 2 - Task 2. Journal Entry Date Particulars Dr. Amt. Cr. Amt. 1 Inventory (Ending Bal.) Dr. 15,600.00 Cost of Goods Sold Dr. 97,200.00 To Purchases 92,800.00 To Inventory (Beginnng Balance) 20,000.00 (Record the Adjusting Entry for Cost of Goods Sold & Ending Inventory) Answer 3 - Task 2. Spare Parts Inc. Income Statement For the year Ended Dec 31, 2016 Sales Revenue Sales 980,000.00 Less: Cost of Goods Sold 97,200.00 Gross Margin 882,800.00 Operating Expenses Selling & Admn. Expenes Rent Expenses 16,000.00 Insurance Expenses 5,000.00 Salaries & Wages Expenses 80,000.00 Supplies Expenses 8,000.00 Utilities Expenses 6,000.00 Depreciation expenses 2,500.00 Phone / Internet Expense 1,200.00 Advertising Expense 16,000.00 134,700.00 Net Operating Income 748,100.00 Other Income & Losses Interest Expense 250.00 Net Income (Loss) before Tax 747,850.00 Income Tax - 28% 209,398.00 Net Income 538,452.00 Spare Parts Inc. Retained Earning Statement For the year Ended Dec 31, 2016 Beginning Balance 48,650.00 Net Income (Loss) before Tax 538,452.00 Sub-total 587,102.00 Dividends 10,000.00 Ending Balance 577,102.00 Answer 3. Spare Parts Inc. Balance Sheet For the year Ended Dec 31, 2016 Assets Current Assets Cash 450,000.00 Accounts Receivable 28,000.00 Inventory 15,600.00 Supplies 12,000.00 505,600.00 Property, Plant & Equipment Equipment 352,000.00 Accumulated Depreciation (10,000.00) 342,000.00 Total Assets 847,600.00 Liabilities & Stockholders' Equity Liabilities Current Liabilities Accounts Payable 1,000.00 Interest Payable 450.00 Salaries & Wages Payable 4,500.00 Income Tax Payable 209,398.00 Utilities Payable 150.00 215,498.00 Long Term Liabilities Notes Payable 5,000.00 Total Liabilities 220,498.00 Stockholders' Equity Common Stock 40,000.00 Paid in Capital in Excess of Par 10,000.00 Paid Up Capital 50,000.00 Retained Earnings 577,102.00 Total Stockholders' Equity 627,102.00 Total Laibilities & Stockholders' Equity 847,600.00