Inventory and cost of goods: answer key
Answer key: the accepted entries with the amounts of the worksheet, and why.
Convention: United States (US textbooks)
Recording the month’s cost of goods sold in one entry
During the month a store sold 120 units of product A, which cost $15.50 each, and 80 units of product B, which cost $22.50 each. The sales have already been recorded. Record the cost of goods sold for the month.
Assumptions: Perpetual inventory: purchases are recorded in Inventory, and the cost of goods sold is recorded once a month, in one entry, from the inventory records.
Account Debit Credit Cost of Goods Sold $3,660.00 Inventory $3,660.00 Why
The cost of the goods sold is 120 × $15.50 + 80 × $22.50 = $3,660.00. It moves out of Inventory (credit) into Cost of Goods Sold (debit); the sales revenue was recorded separately.
Period-end cost of goods sold under the periodic system
A store’s inventory was $24,000.00 at the start of the year, and its purchases for the year, recorded in Purchases, were $96,000.00. At year end the physical count values the goods on hand at $20,500.00. Record the year-end entry for cost of goods sold.
Assumptions: Periodic inventory: purchases are recorded in Purchases and Inventory is updated only at year end. Cost of goods sold is recorded with an adjusting entry, not through Income Summary. There is no freight-in and there are no purchase returns or discounts.
Account Debit Credit Cost of Goods Sold $99,500.00 Inventory $3,500.00 Purchases $96,000.00 Why
Cost of goods sold = beginning inventory + purchases − ending inventory = $24,000.00 + $96,000.00 − $20,500.00 = $99,500.00. The entry empties Purchases (credit $96,000.00), brings Inventory from $24,000.00 down to $20,500.00 (credit $3,500.00) and debits Cost of Goods Sold for $99,500.00. Recording it in several entries that add up to the same amounts is also accepted.
Writing inventory down to net realizable value
At year end a store still holds 60 units of a discontinued product, bought at $85.00 each. They can now be sold for only $70.00 each, and selling them will cost $5.00 per unit. Record the write-down of these goods.
Assumptions: Perpetual inventory: each sale also records its cost of goods sold. Inventory is measured at the lower of cost and net realizable value, item by item. The write-down is credited directly to Inventory (no allowance account).
Account Debit Credit Cost of Goods Sold $1,200.00 Inventory $1,200.00 Also accepted
Account Debit Credit Loss on Inventory Write-Down $1,200.00 Inventory $1,200.00 Why
Net realizable value per unit is $70.00 − $5.00 = $65.00, below the cost of $85.00, so the 60 units are written down by 60 × ($85.00 − $65.00) = $1,200.00. Inventory is credited; the debit to Cost of Goods Sold is the usual choice, and a separate Loss on Inventory Write-Down account is also accepted.
Using goods from stock as office supplies
A stationery store takes 24 packs of printer paper from its merchandise and uses them in its own office. Each pack cost $4.50.
Assumptions: Perpetual inventory: each sale also records its cost of goods sold. The paper is used up at once.
Account Debit Credit Supplies Expense $108.00 Inventory $108.00 Why
Under the perpetual system the paper is in Inventory at cost: 24 × $4.50 = $108.00. Used in the office, it is no longer merchandise for sale, so Inventory is credited and Supplies Expense debited. Cost of Goods Sold is not involved because nothing was sold.
Paying freight-out on goods sold
A store ships goods it has sold to a customer under FOB destination terms and pays the carrier $320.00 in cash for the delivery.
Assumptions: The delivery cost is not charged on to the customer.
Account Debit Credit Freight-Out $320.00 Cash $320.00 Why
Under FOB destination the seller pays the freight on the goods it sells. Freight-Out (also called Delivery Expense) is a selling expense; it is not added to Inventory, which takes only freight on purchases.
Returning damaged goods for a cash refund
Last week a store bought 50 units of merchandise at $35.00 each and paid in cash. Today it returns 4 damaged units to the supplier, who refunds their cost in cash.
Assumptions: Perpetual inventory: each sale also records its cost of goods sold.
Account Debit Credit Cash $140.00 Inventory $140.00 Why
The returned goods leave Inventory at their cost, 4 × $35.00 = $140.00, and the refund brings the same amount into Cash. Accounts Payable is not involved because the goods had been paid for.
Purchase discount taken, reducing inventory
A store bought merchandise on account for $7,000.00, terms 2/10, n/30, and recorded it in Inventory at the invoice price. It pays the supplier by check within the discount period.
Assumptions: Perpetual inventory: each sale also records its cost of goods sold.
Account Debit Credit Accounts Payable $7,000.00 Inventory $140.00 Cash $6,860.00 Why
The discount is 2% of $7,000.00 = $140.00, so the store pays $6,860.00. Under the perpetual system a discount taken lowers the cost of the goods, so Inventory is credited for $140.00; the whole debt ($7,000.00) leaves Accounts Payable. A Purchase Discounts account belongs to the periodic system.
Recording an inventory count surplus
At year end a store’s inventory records show merchandise costing $31,500.00, but the physical count finds goods costing $31,920.00. Adjust the records to the count.
Assumptions: Perpetual inventory: each sale also records its cost of goods sold. The count is correct and the records contain no posting errors. The company records inventory count differences in Cost of Goods Sold.
Account Debit Credit Inventory $420.00 Cost of Goods Sold $420.00 Why
The count exceeds the records by $31,920.00 − $31,500.00 = $420.00, so Inventory is debited by $420.00. The records had charged too much cost to the goods sold, so Cost of Goods Sold is credited by the same amount.
Donating goods to a charity
A clothing store donates 40 new winter coats from its merchandise to a charity that runs a homeless shelter. Each coat cost $25.00.
Assumptions: Perpetual inventory: each sale also records its cost of goods sold. The coats’ fair value equals their cost. Income taxes are ignored.
Account Debit Credit Charitable Contributions Expense $1,000.00 Inventory $1,000.00 Why
The coats leave Inventory at cost: 40 × $25.00 = $1,000.00. The gift is an expense, Charitable Contributions Expense. Nothing was sold, so neither Sales Revenue nor Cost of Goods Sold is used.
Not in this convention: Transferring unsold purchases to inventory at year end
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