Question

Problem 1 (25 points) Home Furniture Ltd. sells washing machines. At December 31. 2018, Home Furniture L amounted to $250,000. During the first week of January 2018, the company made only o ne purchase and one sale. These transactions were as follows: Purchased 40 machines from Wash Experts. The total cost of these machines was $48,000. Jan. 5 Discount terms 3/10, n/60. Sold 8machines on account to Home supply Ltd. The total sales price was $82.500. Jan. 12 The total cost of these 38 units to Norfolk was $30,800. Home Furniture Ltd. has a full-time accountant and a computer-based accounting system. Its records sales at the gross sales price and purchases at net cost and maintains subsidiary ledgers for accounts receivable, inventory, and accounts payable. Instructions 1. Briefly describe the operating cycle of a merchandising company. Identify the assets and 2. Prepare journal entries to record these transactions, assuming Home Furniture Ltd. uses a 3. Compute the balance in the Inventory control account at the close of business on January 12. liabilities directly affected by this cycle. (5 points) perpetual inventory system. (5 points) (5 points)

Answer 1

1. The operating cycle of a merchandising company covers the period from investing cash for purchasing merchandise and ends with the collection of cash by selling the merchandise.

Therefore, the typical operating cycle of a merchandising company = Inventory Conversion Period + Average Collection Period.

2. In the books of Home Furniture Ltd. :

Date	Account Titles	Debit	Credit
		$	$
Jan 5	Inventory	46,560
	Accounts Payable		46,560
	To record purchase of inventory on credit
Jan 12	Accounts Receivable	82,500
	Sales		82,500
	To record sales on credit
Jan 12	Cost of Goods Sold	30,800
	Inventory		30,800
	To record cost of goods sold

3. Balance in Inventory Control Account at the close of business on Jan 12 = $ 250,000 + $ 46,560 - $ 30,800 = $ 265,760.