At a lump-sum cost of $66500, Carla Vista Company recently purchased the followi
ID: 2541953 • Letter: A
Question
At a lump-sum cost of $66500, Carla Vista Company recently purchased the following items for resale:
Item
No. of Items Purchased
Resale Price Per Unit
M
3500
$3.50
N
1750
11.50
O
5500
5.50
The appropriate cost per unit of inventory is:
M
N
O
$6.19
$6.19
$6.19
$3.50
$11.50
$5.50
$3.72
$12.21
$5.84
$3.61
$11.86
$5.67
During 2017, Carla Vista Co., a manufacturer of chocolate candies, contracted to purchase 245000 pounds of cocoa beans at $3.50 per pound, delivery to be made in the spring of 2018. Because a record harvest is predicted for 2018, the price per pound for cocoa beans had fallen to $3.05 by December 31, 2017.
Of the following journal entries, the one which would properly reflect in 2017 the effect of the commitment of Carla Vista Co. to purchase the 245000 pounds of cocoa is
110250
Item
No. of Items Purchased
Resale Price Per Unit
M
3500
$3.50
N
1750
11.50
O
5500
5.50
Explanation / Answer
1) Firstly we need to calculate total resale vale of goods purchased which is shown as follows:-
Now the lump sum cost of $66,500 will be allocated to three items in the ratio of their respective resale value which is shown as follows:- (Amounts in $)
Hence the correct answer is M = $3.72, N = $12.21, O = $5.84
2) Since no inventory is brought in the year 2017, only contract to purchase is made therefore no journal entry is required in 2017 regarding inventory and accounts payable. But at the end of year 2017 (i.e. on December 31, 2017) a journal entry to recognnize liability on purchase commitments is required. The price of cocoa beans has fallen to $3.05 and the contracted price is $3.50
Estimated Liability on Purchase Commitments = ($3.50 - $3.05)*245,000 pounds = $110,250
Therefore the journal entry to be made in 2017 is
110250
Item No. of items purchased (A) Resale Price pr unit (B) Total resale Value (A*B) M 3,500 $3.50 $12,250 N 1,750 $11.50 $20,125 O 5,500 $5.50 $30,250 Total Resale Value $62,625Related Questions
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