Question

Socket Corporation is a supplier of electronic components used in the manufacture of computers. The company uses the FIFO cost flow method. During the month of September 2014, Socket’s inventory records for part CAP-0356, showed the following transactions:

Date	transaction	Units purchased	Unit cost	Units sold	Unit selling price
Sept 1	balance	900	$1.50
Sept 8	Purchase	400	$1.58
Sept 17	Sale		(800)		$4.19
Sept 23	Sale		(250)		$4.29
Sept 30	purchase	650		$1.79

Instructions

1. a) Assuming Socket uses a perpetual inventory system; prepare the journal entries for each of the above listed transactions.

b) Assuming Socket uses a periodic inventory system; explain how the journal entries as compared to part a. would differ. Be specific. Do not prepare journal entries.

c) What would be the difference in total cost of goods sold between parts a. and b.? Explain your answer.

Answer 1

1. a)
Date	Accounts Titles and Explanations	Debit	Credit
Sept. 1	No entry required for Beginning Inventory
Sept. 8	Merchandise Inventory (400 units * $1.58 per unit)	$632
	Cash		$632
	(To record the purchase of 400 units)
Sept. 17	Cash	$3,352
	Sales Revenue (800 units * $4.19 per unit)		$3,352
	(To record the sale of 800 units)
	Cost of Goods Sold	$1,200
	Merchandise Inventory (800 units * $1.50 per unit)		$1,200
	(To record the cost of goods sold for 800 units)
Sept. 23	Cash	$1,073
	Sales Revenue (250 units * $4.29 per unit)		$1,073
	(To record the sale of 800 units)
	Cost of Goods Sold	$389
	Merchandise Inventory [(100 units * $1.50 per unit)+(150 units * $1.58 per unit)]		$389
	(To record the cost of goods sold for 800 units)
Sept. 30	Merchandise Inventory (650 units * $1.79 per unit)	$1,164
	Cash		$1,164
	(To record the purchase of 400 units)

b)

Periodic Inventory System:

Under Periodic Inventory System, all the purchases are recorded using Purchase account instead of Merchandise Inventory account so in case of purchases, Purchase Account is debited and Cash account is credited.

Under Periodic Inventory System, all the sales are recorded but cost of goods sold are recorded at the end of the period but not at the each transaction like Perpetual Inventory System so Under Periodic Inventory System, only sales are recorded but the cost of goods sold is recorded only at the end of the period.

As informed, journal entries are not prepared under Periodic Inventory System.

c)

There is no difference between the cost of goods sold under both Period and Perpetual Inventory Systems at the end of the period because the main method used is FIFO so goods first issued are sold first which is same under both the systems. It will change when other methods like LIFO or Weighted average methods are used.