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Define cost as it relates to determining the value of inventory

Cost of inventory refers to the different cost elements incurred to produce the products for the sale in the
normal course of business. These cost elements are direct material, direct labor and manufacturing
overheads.
What is a cash discount?
Cash discount is the discount offered by the seller to the buyer to motivate for the payment of the goods
within the discounted period.
Explain what the term 3/10 n/30 means.
This means that 3% cash discount is allowed if payment is made in 10 days while the payment is due in
30 days.
What is a perpetual inventory system?
Perpetual inventory system is the system where information for inventory quantity and availability is
maintain after each transaction of its purchase or sale. Under this method cost of goods sold and ending
inventory level is maintained after each purchase or sale.
What is a periodic inventory system?
Periodic inventory system is the system where updation of inventory quantity is made at the end of an
accounting period and under this system, there is no need to maintain the quantity availability after each
purchase or sale.
Explain the concept of lower-of-cost-or-market.
Lower of cost or market rule state that business should maintain the recoverable amount of the inventory
at every time and ending inventory cost is compared with its market value with the view to record the
inventory at lower of cost or market value.
MULTIPLE CHOI CE
On February 13, North Carolina Furniture purchases three sofas from a manufacturer for $300
each. The terms of the sale are 2/10 n/45. North Carolina Furniture pays the invoice on February
21. How much did they pay?
c. $882
Crayson Inc. started the year with $490,000 in beginning inventory. During the year, Crayson
purchased an additional $1,060,000 in inventory. At the end of the year, Crayson employees
performed a physical count and determined that ending inventory amounted to $450,000. What was
Craysons cost of goods sold for the year?
a. $1,100,000
Raceway Corporation manufactures miniature cars and racetracks for collectors and enthusiasts.
Raceway placed an order for supplies from Delta Inc. on December 1. The sales staff at Delta
informed Raceway that the supplies would not be available to ship out until December 22 and
Raceway accepted this arrangement. The supplies actually shipped, FOB shipping point, on

December 26 and arrived at Raceways receiving dock on January 2. On which date should
Raceway include the supplies in its inventory?
c. December 26
PROBLEMS
ConnecTech bought 400 computers in December 20X2 for $300 each. It paid $260 to have them
delivered to its store. In January 20X3, ConnecTech sold 220 of the computers for $550 each.
ConnecTech uses a perpetual inventory system.
a. Prepare the journal entry(ies) to record ConnecTechs purchase of the computers.
Inventory (400 x $300) + $260

$120,260 Dr.

Cash

$120,260 Cr.

b. Determine the balance in ConnecTechs ending inventory on December 31, 20X2.


Ending Inventory 400 x $300.65

= $120,260

c. Prepare the journal entry (ies) to record the sale of the computers.
For Sale of goods:
Cash

(220 x $550)

$121,000 Dr.

Sale Revenue

$121,000 Cr

For Cost of goods:


Cost of goods sold (220 x $300.65)

$66,143 Dr.

Inventory

$66,143 Cr.

d. Determine the balance in ConnecTechs ending inventory on January 31, 20X3.


Ending Inventory (400 220) x $300.65

= $54,117

Montez Muffins and More is a bakery located in New York. Montez purchases a great deal of flour
in bulk from a wholesaler. The wholesaler offers purchase discounts for fast payment. Montez
purchased 600 pounds of flour for $100 on May 1, under terms 2/10 n/30. Determine the amount
Montez should pay under the following scenarios:
a. Montez pays the full balance on May 25.
As this payment is after discount period, no discount will be applicable on this payment:
Payment amount

= $100

b. Montez pays the full balance on May 10.


As this payment amount is within the discount period, 2% discount will be applicable on the repayment:
Payment amount $100 x (1-2%)

= $98

c. Montez pays half the balance on May 10 and half on May 25.

As this payment amount is within the discount period, 2% discount will be applicable on the repayment:
First half payment amount $50 x (1-2%)

= $49

As this payment is after discount period, no discount will be applicable on this payment:
Second half payment amount

= $50

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