accounting

Exercise VIII

VIII.A. Accounting Cycle

The Accounting Cycle – Problem Set ABC Company Ltd.

Summary of transactions during December:

1. Paid outstanding salary payables.

2. Paid trade creditors € 2,500.

3. Salaries to employees of € 1 200 were calculated for December to be paid in January.

4. Purchase of € 1 500 of Office Supplies Inventory with 10% cash discount for cash transaction.

5. Purchase of raw materials Inventory of € 1 900 was done with two month trade credit.

6. The freight in for both supplies and raw material inventory was paid in the amount of € 200.

7. Due to the low quality of the purchased office supplies inventory the company returned back € 300 of inventory.

8. Performed advertisement services for Customer XYZ, for which we will receive € 2,000 on 3 month credit sale.

9. At the end of month the Customer XYZ made a claim on the advertisement services and we agreed to sales allowance (a reduction of the original selling price) in the amount of 25%.

10. Received an invoice for a series of advertisements, € 3 000, that appeared in the local news during December and will be paid in January.

11. Received an invoice for external services of € 1 500 for December to be paid with 60 credit term

12. Performed consulting services, in the amount of € 2,000 with 20% for cash discount on sales (cash immediately received).

13. In November 2014 we performed additional consulting work, € 2 100 on credit (10/30, n 90) and in December 2014 the customer used the discount for prompt payment.

14. We sold office supplies inventory on the market for € 2000 through credit card transaction (a straight 2% of credit card services were taken).

15. The cost of office supplies used during December is € 200.

16. The cost of raw materials inventory used during December is € 3 000.

17. In the beginning of October 2014 a subscription rights for local newspaper magazine of € 2 500 was paid for five month term in advance;

18. In the beginning of November 2014 company receives rent for 3 months in advance, €3,000

19. At the end of the month Company repaid to the Bank credit tranche € 500 and paid interest charges (interest rate as of 5% p.a.)

20. Depreciation of equipment for December amounts to € 250.

21. ABC company acknowledged the € 1 500 worth of bad debts in December 2014.

Required:

a) Prepare the opening journal entry on Dec. 1, 2014.

b) Prepare the journal entries for the transactions (1– 21) for the month of December and post them to the T-accounts, opening additional T-accounts for accounts as needed. Cross-reference the entries using the numbers of the transactions above.

c) Prepare a trial balance.

d) Prepare the adjusting journal entries and record them at the end of December in the T-accounts as well as in the trial balance.

e) Prepare the closing entries for the temporary accounts and the Income Statement.

f) Prepare the closing entries for the permanent accounts and the Balance Sheet as of Dec. 31, 2014.

VIII.B. Valuation of Inventories

The inventory of ABC Company on November 30, 2014 shows 500 units at € 100 per unit. A physical inventory on December 31, 2014, shows a total of 700 units on hand. Revenue from sales for December totals € 300,000 (= 2,000 units at € 150 per unit). The following purchases were made during December 2014:

Dec. 11: 1,100 units at € 110 per unit

Dec. 23: 700 units at € 115 per unit

Dec. 27: 400 units at € 135 per unit

Requirement:

1. Calculate the cost of goods sold for December 2014 and the inventory cost as of December 31, 2014, using the FIFO method and LIFO method.

2. Compute the gross profit for December 2014.

VIII.C. Valuation of Inventories

Assume a vendor of soft drinks starts out the week with no inventory. He buys and sells cola as follows:

· Buys 5 cans on Monday for 40 cents

· Buys 4 cans on Tuesday for 30 cents

· Buys 2 cans on Wednesday for 50 cents

· Sells 10 cans on Thursday for 70 cents

Please shows the vendor’s cost of goods sold and ending inventory under the four methods.

VIII.D. Cost of goods sold under the periodic system inventory for 2015

The gross sales from whole 2015 period were € 2 500 and the sales returns were 5%. Additionally the company is offering 4% of cash discount of sales to their customers (the cash sales was € 1 000). At the beginning of the period December 31, 2014 the merchandise inventory level was € 500 and during the year 2015 the company purchased € 1 500 of merchandise with 10% cash discount (the cash purchases was € 500). Due to the low quality of the merchandise the company agreed with the suppliers on € 200 purchase allowance. The freight –in cost for the 2015 period were € 50. The ending inventory as of December 31, 2015 level was € 250. Please calculate cost of goods sold and gross profit under the periodic system inventory for 2015.

AssetsEquities

Equipment 2 000Paid-in Capital 3 000

Land1 500Retained Earnings 1 800

Raw materials Inventory 1 800Loan Payable 2 500

Office Supplies Inventory 1 200Salary payables 1 500

Accounts Receivable3 200Accounts payable 3 400

Cash, Bank 4 500Unearned rent revenue2 000

Prepaid expenses 1 500

Allowance for

uncollectible accounts

1 500

Total assets15 700Total equities15 700

Balance Sheet on Nov. 30, 2014