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CH 05

Here are the answers to Natalie's questions: 1. The mixers should be classified as inventory because they are purchased for resale to customers. 2. I would recommend using the perpetual inventory system because it allows for more frequent updates to inventory balances as items are purchased and sold. This system is better suited for the type of inventory Natalie wants to sell. 3. With a perpetual system, inventory should be counted anytime it is purchased or sold to ensure the inventory records remain accurate. A full physical count is also recommended periodically, such as at the end of each month.

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271 views

CH 05

Here are the answers to Natalie's questions: 1. The mixers should be classified as inventory because they are purchased for resale to customers. 2. I would recommend using the perpetual inventory system because it allows for more frequent updates to inventory balances as items are purchased and sold. This system is better suited for the type of inventory Natalie wants to sell. 3. With a perpetual system, inventory should be counted anytime it is purchased or sold to ensure the inventory records remain accurate. A full physical count is also recommended periodically, such as at the end of each month.

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kid
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CHAPTER 5

Cookie Creations
(Note: This is a continuation of the Cookie Creations from Chapters 1 through 4. From the in-
formation gathered in the previous chapters, follow the instructions below using the general
ledger accounts you have already prepared.)

CC5 Because Natalie has had such a successful first few months, she is considering other
opportunities to develop her business. One opportunity is the sale of fine European mixers.
The owner of Kzinski Supply Co. has approached Natalie to become the exclusive distributor
of these fine mixers in her state. The current cost of a mixer is approximately $575, and
Natalie would sell each one for $1,150. Natalie comes to you for advice on how to account
for these mixers. Each appliance has a serial number and can be easily identified.
Natalie asks you the following questions.
1. “Would you consider these mixers to be inventory? Or should they be classified as
supplies or equipment?”
2. “I’ve learned a little about keeping track of inventory using both the perpetual and the
periodic systems of accounting for inventory. Which system do you think is better? Which
one would you recommend for the type of inventory that I want to sell?”
3. “How often do I need to count inventory if I maintain it using the perpetual system? Do I
need to count inventory at all?”
In the end, Natalie decides to use the perpetual inventory system. The following
transactions happen during the month of January.

Jan. 4 Bought five deluxe mixers on account from Kzinski Supply Co. for $2,875, FOB
shipping point, terms n/30.

6 Paid $100 freight on the January 4 purchase.

7 Returned one of the mixers to Kzinski because it was damaged during shipping.
Kzinski issues Cookie Creations credit for the cost of mixer plus $20 for the cost of
freight that was paid on January 6 for one mixer.

8 Collected $375 of the accounts receivable from December 2013.

12 Three deluxe mixers are sold on account for $3,450, FOB destination, terns n/30.
(Cost of goods sold is $595 per mixer.)

14 Paid the $75 of delivery charges for the three mixers that were sold on January
12.

14 Bought four deluxe mixers on account from Kzinski Supply Co. for $2,300, FOB
shipping point, terms n/30.

17 Natalie is concerned that there is not enough cash available to pay for all of the
mixers purchased. She invests an additional $1,000 cash in Cookie Creations.
18 Paid $80 freight on the January 14 purchase.

20 Sold two deluxe mixers for $2,300 cash. (Cost of goods sold is $595 per mixer.)

28 Natalie issued a check to her assistant for all the help the assistant has given her
during the month. Her assistant worked 20 hours in January and is also paid the
$56 owed at December 31, 2016. (Natalie’s assistant earns $8 an hour.)

28 Collected the amounts due from customers for the January 12 transaction.

30 Paid a $145 cellphone bill ($75 for the December 2016 account payable and $70
for the month of January). (Recall that the cellphone is used only for business
purposes.)

31 Paid Kzinski all amounts due.

31 Natalie withdrew $750 cash for personal use.

As of January 31, the following adjusting entry data is available.

1. A count of baking supplies reveals that none were used in January.

2. Another month’s worth of depreciation needs to be recorded on the $1,200 of baking


equipment bought in November. (Recall that the baking equipment has a useful life of 5
years or 60 months and no salvage value.)

3. An additional month’s worth of interest on her grandmother’s $2,000 loan needs to be


accrued. (The interest rate is 6%.)

4. During the month, $110 of insurance has expired.

5. An analysis of the unearned revenue account reveals that Natalie has not had time to
teach any of these lessons this month because she has been so busy selling mixers. As
a result, there is no change to the unearned revenue account. Natalie hopes to complete
the remaining lessons in February.

6. An inventory count of mixers at the end of January reveals that Natalie has three mixers
remaining.

Instructions
(a) Answer Natalie’s questions.
(b) Prepare and post the January 2017 transactions.
(c) Prepare a trial balance.
(d) Prepare and post the adjusting journal entries required.
(e) Prepare an adjusted trial balance.
(f) Prepare a multiple-step income statement for the month ended January 31, 2017.

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