Explosive Entertainment Inc. (EEI) is a wholesaler that sells three lines of sou
ID: 2527672 • Letter: E
Question
Explosive Entertainment Inc. (EEI) is a wholesaler that sells three lines of sound systems. Pertinent details of the company follow:
• EEI purchases and resells the outdoor Product A and jogging Product B sound systems without alteration. For its indoor Product C sound system, EEI purchases the three component parts from separate producers and then assembles the finished product on its premises.
• EEI tracks its inventory using a perpetual inventory system and values it using the weighted average cost formula.
• The terms of all of EEI’s sales are FOB shipping point — that is, EEI records revenue when the product is shipped from its premises. EEI normally offers credit terms of 2/10, net 30 to its retail clients. The company records its accounts receivable using the gross method. EEI sells strictly on a cash basis to unestablished new clients. EEI also occasionally offers extended payment terms to well-established clients, and tailors the credit terms to suit the specific situation.
• The terms of all of EEI’s purchases are FOB destination — that is, EEI takes ownership of the goods when received from the vendor. All but one of EEI’s suppliers offer 30-day credit terms to the company. The exception is Active Co., which supplies the jogging sound system (Product B). Active Co. offers EEI terms of 1/15, net 30. EEI records its accounts payable using the gross method.
• While the resulting journal entries will all be entered to the nearest dollar, EEI rounds all dollar-based calculations to the nearest whole cent (for example, $21.46) and percentages to two decimal places (for example, 13.41%). You should do likewise in your supporting calculations.
• EEI’s opening inventory as at December 1, 20X4, follows:
Product
Units
Cost Per Unit
Total Cost
Finished Inventory
Outdoor
A
384
$110
$42,240
Jogging
B
422
$46
$19,412
Indoor
C
239
$132
$31,548
WIP Inventory
Receivers
C1
62
$50
$3,100
Ampliefiers
C2
58
$40
$2,320
Speakers
C3
115
$20
$2,300
$100,920
Product C — components of indoor sound system and number of units
Receiver (C1) 1 unit
Amplifier (C2) 1 unit
Speaker (C3) 2 units
Conversion costs $5 per finished indoor sound system (Product C)
Note: Conversion costs are debited to inventory and credited to wage expense.
• EEI maintains separate general ledger accounts for finished inventory and work-in- progress (WIP) inventory.
• EEI’s inventory-related transactions for December 20X4 (not recorded in the company’s accounting records) are as follows:
December 1, 20X4
i) EEI received 100 units of Product A from Electronics Ltd. at a cost of $105 per unit plus a total of $200 freight-in.
ii) EEI received 200 units of Product B from Active Co. at a total cost of $8,800.
iii) EEI received a $9,800 payment on account from Mega Retailer Corp. (MRC) within the 10-day discount period for goods sold in November 20X4.
December 6, 20X4
iv) EEI sold 80 units of Product A for $16,000 cash.
December 8, 20X4
v) EEI received 200 units of Product A from Electronics Ltd. at a cost of $98 per unit plus $300 freight-in and $980 GST.
vi) EEI received an $11,500 payment on account from MRC. This payment was received 25 days after the invoice date for goods sold in November 20X4.
vii) EEI assembled 50 units of Product C. 3
December 12, 20X4
viii) EEI paid the invoice pertaining to the units of Product B received on December 1, 20X4.
ix) EEI accepted a one-year, interest-free, $57,000 note from Stereo Discounter Corp. (SDC) in exchange for 200 units of Product C. The cash-equivalent sales price for the goods was $54,000.
x) EEI shipped 100 units of Product A to Clarity Inc. and invoiced the company for $20,000.
December 18, 20X4
xi) EEI received payment in full from Clarity for the sale of Product A on December 12, 20X4.
xii) EEI shipped 300 units of Product B to Clarity on a priority basis and invoiced the customer for $27,700, including $100 of freight costs.
December 24, 20X4
xiii) EEI sold 150 units of Product A to Renegade Retail Corp. (RRC) for $30,000 before an expected price increase took effect on January 1, 20X5. As RRC does not have sufficient storage space on its premises, EEI has agreed to store the inventory at its premises on behalf of the customer. Given the generic nature of the product and as EEI almost always has this inventory in stock, EEI did not specifically segregate the inventory that it agreed to sell to RRC.
December 30, 20X4
xiv) EEI shipped 50 units of Product A to RRC relating to the sale of goods on December 24, 20X4.
xv) EEI received payment in full from Clarity for the sale of Product B on December 18, 20X4.
• During December 20X4, there were several factors that impacted both the price that EEI pays for its product and the price for which it can sell the finished product. EEI compiled the information that follows with the effective date of these costs and prices being December 31, 20X4.
Replacement Cost
Sale Price
Cost to Sell
Product A
$80
$150
$3
Product B
$25
$38
$2
Product C
$270
0
Component C1
$40
Component C2
$30
Component C3
$15
• EEI reviewed its accounts receivable at its December 31, 20X4, year end and determined that it needed an allowance for doubtful accounts equal to the following:
o 1% of accounts aged from 0 to 30 days
o 2% of accounts aged from 31 to 60 days
o 5% of accounts aged from 61 to 90 days
o 50% of accounts aged 91 days and longer
• A summary of EEI’s accounts receivable and other pertinent information follows:
Summary aging report — December 31, 20X4
0-30 Days
31-60 Days
61-90 Days
91+ Days
Total
$89,142.13
$45,241.79
$13,462.54
$6,311.97
$154,158.43
Allowance for doubtful accounts — January 1, 20X4 $3,541.87
Bad debt expense provided for during 20X4 4,800.00
Write-offs of accounts receivable during 20X4 4,721.48
Recovery of bad debts in 20X4 previously written off 891.67
Required:
a) Calculate the cost of goods sold (COGS) for the month of December 20X4 before the required adjustments, if any, are made to value EEI’s inventory at the lower of cost and net realizable value. Provide separate totals for each category of inventory as well as the total COGS.
b) Calculate the closing inventory as at December 31, 20X4, after the required adjustments, if any, are made to value EEI’s inventory at the lower of cost and net realizable value. Provide separate totals for each category of inventory as well as the total inventory holdings.
c) Determine the remaining bad debt expense that needs to be recorded by EEI at the end of the 20X4 fiscal year.
d) Record the journal entries pertaining to the identified transactions in the same order as those presented in the question. Ensure that the journal entries are dated and include a brief description of the pertinent details. Supporting calculations are to be referenced or included in the description.
e) Record the year-end adjusting journal entries pertaining to: i) the valuation of inventory at the lower of cost and net realizable value; ii) the bad debt expense for the year; and iii) the accrual of interest revenue.
Product
Units
Cost Per Unit
Total Cost
Finished Inventory
Outdoor
A
384
$110
$42,240
Jogging
B
422
$46
$19,412
Indoor
C
239
$132
$31,548
WIP Inventory
Receivers
C1
62
$50
$3,100
Ampliefiers
C2
58
$40
$2,320
Speakers
C3
115
$20
$2,300
$100,920
Product C — components of indoor sound system and number of units
Receiver (C1) 1 unit
Amplifier (C2) 1 unit
Speaker (C3) 2 units
Conversion costs $5 per finished indoor sound system (Product C)
Note: Conversion costs are debited to inventory and credited to wage expense.
• EEI maintains separate general ledger accounts for finished inventory and work-in- progress (WIP) inventory.
• EEI’s inventory-related transactions for December 20X4 (not recorded in the company’s accounting records) are as follows:
December 1, 20X4
i) EEI received 100 units of Product A from Electronics Ltd. at a cost of $105 per unit plus a total of $200 freight-in.
ii) EEI received 200 units of Product B from Active Co. at a total cost of $8,800.
iii) EEI received a $9,800 payment on account from Mega Retailer Corp. (MRC) within the 10-day discount period for goods sold in November 20X4.
December 6, 20X4
iv) EEI sold 80 units of Product A for $16,000 cash.
December 8, 20X4
v) EEI received 200 units of Product A from Electronics Ltd. at a cost of $98 per unit plus $300 freight-in and $980 GST.
vi) EEI received an $11,500 payment on account from MRC. This payment was received 25 days after the invoice date for goods sold in November 20X4.
vii) EEI assembled 50 units of Product C. 3
December 12, 20X4
viii) EEI paid the invoice pertaining to the units of Product B received on December 1, 20X4.
ix) EEI accepted a one-year, interest-free, $57,000 note from Stereo Discounter Corp. (SDC) in exchange for 200 units of Product C. The cash-equivalent sales price for the goods was $54,000.
x) EEI shipped 100 units of Product A to Clarity Inc. and invoiced the company for $20,000.
December 18, 20X4
xi) EEI received payment in full from Clarity for the sale of Product A on December 12, 20X4.
xii) EEI shipped 300 units of Product B to Clarity on a priority basis and invoiced the customer for $27,700, including $100 of freight costs.
December 24, 20X4
xiii) EEI sold 150 units of Product A to Renegade Retail Corp. (RRC) for $30,000 before an expected price increase took effect on January 1, 20X5. As RRC does not have sufficient storage space on its premises, EEI has agreed to store the inventory at its premises on behalf of the customer. Given the generic nature of the product and as EEI almost always has this inventory in stock, EEI did not specifically segregate the inventory that it agreed to sell to RRC.
December 30, 20X4
xiv) EEI shipped 50 units of Product A to RRC relating to the sale of goods on December 24, 20X4.
xv) EEI received payment in full from Clarity for the sale of Product B on December 18, 20X4.
• During December 20X4, there were several factors that impacted both the price that EEI pays for its product and the price for which it can sell the finished product. EEI compiled the information that follows with the effective date of these costs and prices being December 31, 20X4.
Replacement Cost
Sale Price
Cost to Sell
Product A
$80
$150
$3
Product B
$25
$38
$2
Product C
$270
0
Component C1
$40
Component C2
$30
Component C3
$15
• EEI reviewed its accounts receivable at its December 31, 20X4, year end and determined that it needed an allowance for doubtful accounts equal to the following:
o 1% of accounts aged from 0 to 30 days
o 2% of accounts aged from 31 to 60 days
o 5% of accounts aged from 61 to 90 days
o 50% of accounts aged 91 days and longer
• A summary of EEI’s accounts receivable and other pertinent information follows:
Summary aging report — December 31, 20X4
0-30 Days
31-60 Days
61-90 Days
91+ Days
Total
$89,142.13
$45,241.79
$13,462.54
$6,311.97
$154,158.43
Allowance for doubtful accounts — January 1, 20X4 $3,541.87
Bad debt expense provided for during 20X4 4,800.00
Write-offs of accounts receivable during 20X4 4,721.48
Recovery of bad debts in 20X4 previously written off 891.67
Required:
a) Calculate the cost of goods sold (COGS) for the month of December 20X4 before the required adjustments, if any, are made to value EEI’s inventory at the lower of cost and net realizable value. Provide separate totals for each category of inventory as well as the total COGS.
b) Calculate the closing inventory as at December 31, 20X4, after the required adjustments, if any, are made to value EEI’s inventory at the lower of cost and net realizable value. Provide separate totals for each category of inventory as well as the total inventory holdings.
c) Determine the remaining bad debt expense that needs to be recorded by EEI at the end of the 20X4 fiscal year.
d) Record the journal entries pertaining to the identified transactions in the same order as those presented in the question. Ensure that the journal entries are dated and include a brief description of the pertinent details. Supporting calculations are to be referenced or included in the description.
e) Record the year-end adjusting journal entries pertaining to: i) the valuation of inventory at the lower of cost and net realizable value; ii) the bad debt expense for the year; and iii) the accrual of interest revenue.
Explanation / Answer
a) Cost of Good Sold Product Outdoor Jogging Indoor A B C Units Rate $ Units Rate $ Units Rate $ Cost of Goods is as per below Opening Stock 384 110 42240 422 46 19412 239 132 31548 Add: Purchases 300 211.4 31580 200 44 8800 0 0 0 Assembly pf Product C 50 6750 Sub-total 684 107.92 73820 622 45.36 28212 289 132.52 38298 Less: Closing stock 354 107.73 38,137 322 45.36 14,605 89 132.52 11,794 Cost of Goods is 330 108.13 35,683 300 45.36 13,607 200 132.52 26,504 b) Cost of Closing Inventory is worked out below Product Outdoor Jogging Indoor A B C Units Rate $ Units Rate $ Units Rate $ Dec 1, 20X4 Opening Inventory 384 110 42240 422 46 19412 239 132 31548 Dec 1, 20X4 AddL Purchases 100 107 10700 200 44 8800 Sub-total 484 109.38 52940 622 45.36 28212 Dec 6, 20X4 Cash Sales -80 109.38 -8,750 Dec 8, 20X4 AddL Purchases 200 104.40 20880 Dec 8, 20X4 Product C assembled 50 130 6500 Conversion costs 250 Sub-total 604 107.73 65,070 622 45.36 28,212 289 132.52 38298 Dec 12, 20X4 -200 132.52 -26503.8 Dec 12, 20X4 Sales -100 107.73 -10,773 Dec 18, 20X4 Sales -300 45.36 -13,607 Sub-total 504 107.73 54,296 322 45.36 14,605 89 132.52 11,794 Dec 24, 20X4 sales -150 107.73 -16,160 Closing Balance 354 107.73 38,137 322 45.36 14,605 89 132.52 11,794 WIP Inventory (workings) Product Date C1 C2 C3 Units Rate $ Units Rate $ Units Rate $ Dec 1, 20X4 Opening Inventory 62 50 3100 58 40 2320 115 20 2300 Dec 8, 20X4 Product C 50 units assembled -50 50 -2500 -50 40 -2000 -100 20 -2000 12 50 600 8 40 320 15 20 300 d) Journal Enries Date Particulars Dr Cr Dec 1, 20X4 Product A Dr 10500 Product A Dr 200 - To Electronics Ltd 10700 (Being 100 units of Product A received from Electronic Ltd) Dec 1, 20X4 Product B Dr 8800 - To Active Co. 8800 (Being 200 units of Product B received from Active Co. Dec 6, 20X4 Cash A/c Dr 16000 - Product A 16000 (Being 80 units sold for cash) Dec 8, 20X4 Product A Dr 19600 Product A Dr 300 GST Tax Dr 980 - To Electronics Ltd 20880 (Being 200 units of Product A received from Electronic Ltd) Dec 8, 20X4 Cash A.c Dr 11500 - To MRC 11500 (Being money received from MRC) Dec 8, 20X4 Product C Dr 6500 Product C Dr 250 - To WIP C1 2500 - To WIP C2 2000 - To WIP C3 2000 - To Wage expenses 250 (Being assemble costs of 50 units of Product C) Dec 12, 20X4 Active Co. Dr 8800 - To Cash 8800 (Being payment made to Active Co. no discount availed) Dec 12, 20X4 Cash 54000 Stereo Discounter Corpn 3000 - To Product C 57000 (Being sale booked for 200 units of product C sold to Stereo Discounter Corpn, extra $3000 note accepted accounted) Dec 12, 20X4 Clarity Inc. Dr 20000 To Product A 20000 (Being 100 units sold to Clarity Inc.) Dec 18, 20X4 Cash A/c Dr 19600 Sales Discount Dr 400 To Clarity Inc. 20000 (Being payment received from Clarity Inc. cash discount availed) Dec 18, 20X4 Clarity Inc. Dr 27700 To Product B 27700 (Being 300 units sold to Clarity Inc.) Dec 24, 20X4 Renegade Retail Corpn Dr 30000 To Product A 30000 (Being 150 units sold to Renegade) Dec 30, 20X4 Cash A.c Dr 27700 - To Clarity Inc. 27700 (Being money received from CLARITY) e) Journal enteries Dec 30, 20X4 Bad Debts Dr 2,083.50 To Bad debts allowance 2,083.50 (Being additional bad debts provided) Dec 30, 20X4 Bad debts Dr 1,270.35 To Sales 1,270.35 (Being bad debts accounted) c) Bad Debts Provisions working Aging Report 0-30 Days 31-60 Days 61-90 Days 91+ Days Total Total Debtors $89,142.13 $45,241.79 $13,462.54 $6,311.97 $154,158.43 Allowance rate 1% 2% 5% 50% Allowance needed 891.42 904.84 673.13 3,155.99 5,625.37 Allowance for doubt ful debts in books 3541.87 Further allowance needed 2,083.50 Bad debts provided 4,800.00 write off -4721.48 78.52 recovery of bad debts -891.67 Bad Debts to be accounted 1,270.35 Note the factors faced by the company is assumed given for sake of information only. These factors have already been built in sales price and costs and no further enteries need to be passed on them
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