Question

Hemming Limited (HL) is in the wholesale business with four major product lines. On December 31, 20X1, HL's records showed the following four items in its ending inventory:

Item - Cost - Estimated selling price - Estimated selling cost

Product A $47,000 $49,000 $600

Product B $75,000 $79,000 $2,000

Product C $53,000 $60,000 $2,400

Product D $60,000 $38,000 $2,000

Total $235,000 $226,000 $7,000

On December 31, 20X2, HL's records showed the following in its ending inventory:

Item - Cost - Estimated selling price - Estimated selling cost

Product A $64,000 $78,000 $2,000

Product B $59,000 $40,000 $1,000

Product C $67,000 $39,000 $3,000

Product D $28,000 $31,000 $5,000

Total $218,000 $188,000 $11,000

The four product lines have high turnover and all items of inventory on hand are sold by HL to customers within a year. HL is listed on the TSX and has a December 31 year end. Required: Prepare the necessary adjusting entries for HL on December 31, 20X2 in relation to the company's inventory assuming that HL uses

(1) a perpetual inventory system and the direct method” of adjusting inventory balance.

(ii) a perpetual inventory system and the "allowance method" of adjusting inventory balance.

(iii) a periodic inventory system and the direct method" of adjusting inventory balance.

(iv) a periodic inventory system and the "allowance method of adjusting inventory balance.

Assume that, if the allowance method is used, HL follows the policy of leaving the allowance account on the books and merely adjusting its balance at the next reporting date. For each DEBIT and CREDIT entry, after the name of the account, indicate clearly whether the account is an Income Statement (I/S) account or a Balance Sheet (B/S) account. Show supporting calculations.

Answer 1


UNDER PERPETUAL INVENTORY SYSTEM CASE 1 53,000 Loss on write down of inventory to LCM (1/s) Inventory of Product B (59000-(40000-1000)) (B/s) Inventory of Product C (67000-(39000-3000)) (B/s) Inventory of Product D (28000-(31000-5000)) (B/S) (Direct method of adjusting inventory balance) 20,000 31,000 2,000 CASE 2 53,000 Loss on write down of inventory to LCM (1/s) Allowance to reduce inventory to LCM (B/S) (Allowance method of adjusting inventory balance) 53,000 UNDER PERIODIC INVENTORY SYSTEM 2,35,000 Cost of goods sold Opening inventory of product A Opening inventory of product B Opening inventory of product C Opening inventory of product D (End of period entries) 47,000 75,000 53,000 60,000

Closing inventory of Product A (B/s) Closing inventory of Product B (B/s) Closing inventory of Product C(B/s) Closing inventory of Product D (B/S) Cost of goods sold (1/5) (End of period entries in respect of closing stock) 64000 59000 67000 28000 218000 CASE 3 24000 24000 Loss on write down of inventory to LCM (1/5) Opening inventory of Product D (1/5) (Recording of write down in opening inventory of product D as per direct method)

53000 Loss on write down of inventory to LCM (1/) Closing inventory of Product B (B/s) Closing inventory of Product C(B/s) Closing inventory of Product D (B/s) (Recording of write downs in closing inventory using direct method) 20000 31000 2000 CASE 4 53000 53000 Loss on write down of inventory to LCM (1/s) Allowance to reduce inventory to LCM (B/S) (Allowance method of adjusting closing inventory balances) 24000 24000 Loss on write down of inventory to LCM (1/5) Inventory reserve (B/s) (Write down in respect of opening stock using allowance method)