Jones Widget Company (JWC) incorporated near the end of 2013. Operations began i
ID: 2467330 • Letter: J
Question
Jones Widget Company (JWC) incorporated near the end of 2013. Operations began in January of 2014. JWC prepares adjusting entries and financial statements at the end of each month. The statements report monthly results for the period February 1-29, 2014.
Pertinent items of general information:
Beginning Balances from 1/31/14
Cash $33,620
Unearned Revenue (40 units) $6,000
Accounts Receivable $9,510
Accounts Payable (Jan Rent) $1,300
Allowance for Doubtful Accounts $700
Notes Payable $18,000
Inventory (30 units) $2,730
Contributed Capital $15,000
Retained Earnings $4,860
• JWC establishes a policy that it will sell inventory at $150 per unit.
• In January, JWC received a $6,000 advance for 40 units, as reflected in Unearned Revenue.
• JWC’s February 1 inventory balance consisted of 30 units at a total cost of $2,730.
• JWC’s note payable accrues interest at a 10% annual rate.
• JWC will use the FIFO inventory method and record COGS on a perpetual basis.
February Transactions
02/01 Included in JWC’s February 1 Accounts Receivable balance is a $2,000 account due from Kit Kat, a JWC customer. Kit Kat is having cash flow problems and cannot pay its balance at this time. JWC arranges with Kit Kat to convert the $2,000 balance to a note, and Kit Kat signs a 6-month note, at 12% interest. The principal and all interest will be due and payable to JWC on August 1, 2014.
02/02 JWC paid a $500 insurance premium covering the month of February. The amount paid is recorded directly as an expense.
02/05 An additional 150 units of inventory are purchased on account by JWC for $14,100 – terms 3/10, n30; FOB Destination.
02/10 Sales of 110 units of inventory occurred during the period of 02/07 – 02/10. The sales terms are 2/10, net 30.
02/15 The advance order for 40 units from January is delivered to the customer.
02/15 20 units of the inventory that had been sold on 2/10 are returned to JWC. The units are not damaged and can be resold. Therefore, they are returned to inventory. Assume the units returned are identified as being from the batch that was acquired on 02/05.
02/16 JWC pays the first 2 weeks wages to the employees. The total paid $1,500.
02/17 Paid in full the amount owed for the 02/05 purchase of inventory.
02/18 Wrote off a customer’s account in the amount of $700.
02/19 $2,600 of rent for January and February was paid. Because all of the rent will soon expire, the February portion of the payment is charged directly to expense.
02/19 Collected $4,000 on customers’ Accounts Receivable. Of the $4,000, the discount was taken by the customer on
$3,000 of the account balances.
02/21 A new inventory supplier that charges a lower price per unit is located. The new supplier’s terms are 2/15, n45; FOB Shipping Point. JWC purchases 50 units on account for $4,400.
02/22 JWC paid Federal Express $100 to have the 50 units of inventory delivered overnight. Delivery occurred on 02/22.
02/26 JWC recovered $400 cash from the customer whose account had previously been written off (see 02/18).
02/27 A $400 utility bill for February arrived. It is due on March 15 and will be paid then.
02/28 JWC declared and paid a $500 cash dividend.
02/28 Paid in full the amount owed for the 02/21 purchase of inventory.
Adjusting entries:
02/29 (adjusting 1) Record the $1,500 employee salary that is owed but will be paid March 1.
02/29 (adjusting 2) JWC decides to use the aging method to estimate uncollectible accounts. JWC determines 8% of the ending accounts receivable balance is the appropriate end of February estimate of uncollectible accounts.
02/29 (adjusting 3) Record February interest expense accrued on the note payable.
02/29 (adjusting 4) Record one month’s interest earned Kit Kat’s note (see 02/01)
1) How many units are in ending inventory? ______________ units (show your work below)
2) What is the cost per unit of the ending inventory? $___________ per unit (show your work below)
3) What would be the COGS using the average cost method (Use the periodic inventory system and please, show your work )? ___________
Explanation / Answer
Requirement 1:
Calculation of units in ending inventory:
Date
Particulars
Units
31-01-2014
Opening Inventory
30
05-02-2014
Purchases
150
07-02-2014 to 10-02-2014
Sales
-110
15-02-2014
Advance order delivery
-40
15-02-2014
Sales Returns
20
21-02-2014
Purchases
50
28-02-2014
Ending Inventory
100
Number of units in Ending Inventory = 100
Requirement 2:
Calculation of Cost per unit of the ending inventory:
Calculation of value of ending inventory based on FIFO:
Since the method to be used is FIFO, the last bought goods will be in inventory. Hence 50 units bought on 21st February and 50 units bought on 5th February will be in inventory amounting to total of 100 units.
Value of inventory:
Particulars
Unit Price
Amount
Value of 50 units bought on 21st February
$88
$4400
Value of 50 units bought on 5th February
14100/150 = $94
$4700
$9100
Cost per unit of ending inventory = $9100 / 100 = $91
Requirement 3:
Calculation of Cost of Goods Sold using Average Cost Method:
Opening Inventory
Purchases
Sales
Ending Inventory
Date
Units
Cost
Value
Units
Cost
Value
Units
Cost
Value
Units
Cost
Value
31-01
30
91
2730
30
91
2730
05-02
30
91
2730
150
94
14100
180
93.50
16830
10-02
180
93.50
16830
110
93.50
10285
70
93.50
6545
15-02
70
93.50
6545
40
93.50
3740
30
93.50
2805
15-02
30
93.50
2805
-20
93.50
1870
50
93.50
4675
21-02
50
93.50
4675
50
88
4400
100
90.75
9075
130
15895
Cost of Goods Sold = $15895
Date
Particulars
Units
31-01-2014
Opening Inventory
30
05-02-2014
Purchases
150
07-02-2014 to 10-02-2014
Sales
-110
15-02-2014
Advance order delivery
-40
15-02-2014
Sales Returns
20
21-02-2014
Purchases
50
28-02-2014
Ending Inventory
100
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