Sales – COGS = GMExpense AccountAdd: Deposit in Transit 10000Accounts Rec. 300Weighted AverageFIFOCOGS = (16 @ $7.5 + 35 @ $8.0 + 32 @ $7.0) = $624EI = (38 @ 8.5 + 4 @ 7.5) = $353LIFOEstimating InventoryInventory 2,000EI (before LCM) 1500EI (after LCM) 150COGSMicrophone 16,000 /80,000 = .20Lighting Equipment 44,000 /80,000 = .55Microphone .20 * 60,000 = 12,000New Equipment 460,000Bad Debt Expense 20,000 ($250,000 * .08)Allowance for Bad Debt $16,000Accounts Rec. 3000Reverse Entry made when debt written offCash 3000Bad Debt Expense 4700Purchases and Sales 1,350Bal. 1,0941 EXAM 2 REVIEW KEY Miscellaneous Questions 1. How do you compute gross margin? Sales – COGS = GM 2. What type of account is COGS? Expense Account 3. Explain COGS. Cost of goods sold represents the price that you paid for the goods that you sold. It is an expense account and will be closed to income summary.2 Bank Reconciliation Books Beginning Balance 38650 Add: Interest Collected by Bank 1000 Subtract: Service Charge (50) NSF check (300) 39300 Bank Beginning Balance 45000 Add: Deposit in Transit 10000 Subtract: Outstanding Checks (15700) 39300 Journal Entries Cash (39300-38650) 650 Accounts Rec. 300 Service Charge 50 Interest Rec. 10003 Petty Cash Kara’s Kayaks Inc. created a $300 imprest petty cash account July 1, 2002 with Matt as the fund custodian. During July, Matt authorized and paid the following petty cash tickets: 1 Staples $10.00 2 Dinner w/ client 25.00 3 Postage 20.00 4 Taxi 15.00 At the end of July, $230 is left in the petty cash box. A) Show journal entry to establish fund on July 1. Petty Cash 300 Cash 300 B) Show journal entry to replenish fund on July 31. Supplies 10 Food 25 Postage 20 Transport. 15 Cash 70 C) Show entry needed if fund is increased to $350. Petty Cash 50 Cash 504 Inventory Thirsty Paul owns a store that had a beginning inventory of 32 cases of Plastic Bottle Tequila that cost $7.00 each. During the first month of operations the store purchased inventory as follows: Purchase No. 1 35 @ $8.00 = 280 Purchase No. 2 20 @ $7.50 = 150 Purchase No. 3 38 @ $8.50 = 323 The ending inventory consists of 42 cases of tequila. Calculate ending inventory and cost of goods sold. Beginning Inv. 32 @ $7.00 = 224 Ending Inventory Cost of Goods Sold a) Weighted-average cost 42 * 7.82 = 328 83 * 7.82 = $649 b) FIFO cost $353 __________ $624 ________ c) LIFO cost $304_________ $673__________ Weighted Average 32 + 35 + 20 + 38 = 125 224 + 280 +150 + 323 = 977 977/125 = 7.82 FIFO COGS = (16 @ $7.5 + 35 @ $8.0 + 32 @ $7.0) = $624 EI = (38 @ 8.5 + 4 @ 7.5) = $353 LIFO COGS = (25 @ $8.0 + 20 @ $7.5 + 38 @ 8.5) = $673 EI = (32 @ $7.0 + 10 @ $8.0) = $3045 Estimating Inventory Gross Margin Method The following information is available for Rasmussen’s Super Supplies Inc for 2006: Beginning Inventory $35,000 Net Purchases 80,000 Net Sales 150,000 Historically, gross margin is 40% of sales. Estimate ending inventory using the gross margin method. 1. Find GM GM% = GM/Sales 150,000*.4=60,000 2. Find COGS Sales-GM=COGS 150,000 - 60,000 = 90,000 3. Find EI BI+Purchases-COGS=EI 35,000 + 80,000 - 90,000 = 25,000 Retail Method The following information is available for Brittany’s Emporium for 2006: Cost Retail Beginning Inventory 20,000 28,000 Purchases 63,000 75,000 Goods Available 83,000 103,000 Sales 82,000 Calculate ending inventory at cost using the retail method. 1. Find Cost Ratio GAS at Cost/ GAS at Retail 83,000/103,000= .806 2. Find COGS Cost Ratio * Sales = COGS .806*82,000= 66,092 3. Find EI= GAS-COGS 83,000-66,092= 16,9086 LCM At the beginning of the 2007 season, Rylee had 100 burritos costing $7 each. During the season, Rylee bought additional 200 burritos at $10 each. Also during the year, many imitation burritos were sold, driving down the value of the originals. At the end of the year, there were 150 burritos left which could be sold for $1 each. 1. What are Costs of Goods Sold before applying lower-of-cost-or-market (LCM) concept using FIFO and FIFO assumptions? 2. Using FIFO assumption apply LCM? Use T-accounts please. 1. FIFO 100*7=700 50*10=500 COGS = 1200 LIFO 150*10=1500 Inventory BB 700 2,000 GAS 2,700 COGS 1,200 EI (before LCM) 1500 1,350 write-down EI (after LCM) 150 COGS 1,200 1,3507 Basket Purchase Mike’s Rockstar Co. purchased a spinning drum set, a gold-plated microphone set, and lighting equipment for a lump-sum payment of $60,000. The company hired an appraiser to determine the fair market value of the individual assets. The fair market value of the drum set is $20,000, the microphone set is $16,000, and lighting equipment is $44,000. Make the required journal entry to record the purchase. Total FMV Ratio of Total FMV Asset FMV / of All Assets for Each Asset Drum Set 20,000 /80,000 = .25 Microphone 16,000 /80,000 = .20 Lighting Equipment 44,000 /80,000 = .55 Ratio of Total Cost of Asset Total FMV Basket Purchase Allocated Cost Drum Set .25 * 60,000 = 15,000 Microphone .20 * 60,000 = 12,000 Lighting Equipment .55 * 60,000 = 33,000 Total 60,0008 Depreciation Ellie’s Jukebox Company purchased equipment on 1/1/00 for $500,000. The estimated residual value is 5% of the purchase price and estimated useful life is 10 years. The company also estimated that the equipment would produce 500,000 units over its useful life. In year one, the company produced 47,500 units and in year two, the company produced 43,250 units. Compute the depreciation expense for the first two years using the following methods: a. straight-line Method Year 1 475,000 = 47,500 10 Year 2 475,000 = 47,500 10 b. Double-Declining Balance Method Year 1 500,000 * 1/10 * 2 = 100,000 Year 2 400,000 * 1/10 * 2 = 80,000 c. Sum-of-the-years-digits Method Not needed for this course d. Units of Production Method