Question

P6-5B

Information for BigFishTackle Co. Ltd. is presented in P6.4B. Use the same inventory data and assume that the company uses the perpetual inventory system.

Date	Explanation	Units	Unit Cost	Total Cost
Apr.  1	Beginning inventory	50	$230	$11,500
6	Purchases	35	240	8,400
9	Sales	(55)
14	Purchases	40	245	9,800
20	Sales	(50)
28	Purchases	30	250	7,500

Instructions

(a) Determine the cost of goods sold and cost of ending inventory using average cost. (Use unrounded numbers in your calculations but round to the nearest cent for presentation purposes in your answer.)

(b) When the company counted its inventory at the end of April, it counted only 49 rods on hand. What journal entry, if any, should the company make to record this shortage?

(c) If the company had not discovered this shortage, identify what accounts would be overstated or understated and by what amount.

Record transactions using perpetual FIFO; apply LCNRV.

Answer 1

Answer- 1.
Average Costs
Date	Purchases			Cost of Goods Sold			Balance
	Unit	Cost	Total	Unit	Cost	Total	Unit	Cost	Total
Apr-1							50	230.00	11,500.00
Apr-6	35	240.00	8,400.00				50	230.00	11,500.00
							35	240.00	8,400.00
							85	234.12	19,900.00
Apr-9				55	234.12	12,876.47	30	234.12	7,023.53
Apr-14	40	245.00	9,800.00				30	234.12	7,023.53
							40	245.00	9,800.00
							70	240.34	16,823.53
Apr-20				50	240.34	12,016.81	20	240.34	4,806.72
Apr-28	30	250.00	7,500.00				20	240.34	4,806.72
							30	250.00	7,500.00
							50	246.13	12,306.72
Total	105		25,700.00	105		24,893.28
Cost of Goods Sold = 105 Units = $24,893.28
Ending Inventory = 50 Units = $12,306.72

Answer b.
Journal Entry
Date	Particulars	Dr. Amt.	Cr. Amt.
30-Apr	Cost of Goods Sold	492.27
	Inventory		492.27
	(record the shortage of inventory)
	Loss on Inventory = 2 Units X $246.13 = $492.27 (Approx.)

Answer c.
Cost of Goods Sold	Understated	492.27
Inventory	Overstated	492.27
Retained Earnings	Overstated	492.27