Question

Fong Sai-Yuk Company sells one product. Presented below is information for January for Fong Sai-Yuk Company.

Jan. 1 Inventory 100 units at \(5 each

4 Sale 80 units at \)8 each

11 Purchase 150 units at \(6 each

13 Sale 120 units at \)8.75 each

20 Purchase 160 units at \(7 each

27 Sale 100 units at \)9 each

Fong Sai-Yuk uses the FIFO cost flow assumption. All purchases and sales are on account.

Instructions

(a) Assume Fong Sai-Yuk uses a periodic system. Prepare all necessary journal entries, including the end-of-month closingentry to record cost of goods sold. A physical count indicates that the ending inventory for January is 110 units.

(b) Compute gross profit using the periodic system.

(c) Assume Fong Sai-Yuk uses a perpetual system. Prepare all necessary journal entries.

(d) Compute gross profit using the perpetual system.

Short answer

As the FIFO method is being used, gross profit under the periodic and perpetual systems are the same, i.e., $840.

Step-by-step solution

Journal entries under periodic system

Date	Description	Debit	Credit
Jan 4	Accounts Receivables	$640
	Sales Revenue		$640
	(Being goods sold)
Jan 11	Purchase A/c	$900
	Accounts Payable		$900
	(Being goods purchased on credit)
Jan 13	Accounts Receivables	$1050
	Sales Revenue		$1050
	(Being goods sold on credit)
Jan 20	Purchase A/c	$1120
	Accounts Payable		$1120
	(Being goods purchased on credit)
Jan 27	Accounts Receivables	$900
	Sales Revenue		$900
	(Being goods sold on credit)
Jan 31	Inventory A/c (ending)	$770
	Cost of goods sold	$1750
	Purchase A/c		$2020
	Inventory A/c (beginning)		$500

Working:

As the FIFO method is being used, the cost of ending inventory would be as follows:

1. $\begin{array}{rcl}\mathrm{Cost}\mathrm{of}\mathrm{ending}\mathrm{Inventory}& =& 110\mathrm{units}\mathrm{purchased}\mathrm{on}\mathrm{Jan}20\times \mathrm{Cost}\mathrm{Price}\mathrm{Per}\mathrm{unit}\\ & =& 110\times \$7\\ & =& \$770\end{array}$

2. $\begin{array}{rcl}\mathrm{Cost}\mathrm{of}\mathrm{goods}\mathrm{sold}& =& \mathrm{Total}\mathrm{cost}\mathrm{of}\mathrm{goods}\mathrm{available}\mathrm{for}\mathrm{sale}-\mathrm{Ending}\mathrm{inventory}\\ & =& \$2,520-\$770\\ & =& \$1,750\end{array}$

Gross profit under the periodic system

$\begin{array}{rcl}\mathrm{Gross}\mathrm{profit}& =& \mathrm{Total}\mathrm{sales}-\mathrm{Cost}\mathrm{of}\mathrm{Goods}\mathrm{sold}\\ & =& \$2,590-\$1,750\\ & =& \$840\end{array}$

Journal entries under perpetual system

Date	Description	Debit	Credit
Jan 4	Accounts Receivables	$640
	Sales Revenue		$640
	(Being goods sold)
Jan 4	Cost of goods sold	$400
	Inventory		$400
	(Being cost of goods sold recorded)
Jan 11	Purchase A/c	$900
	Accounts Payable		$900
	(Being goods purchased on credit)
Jan 13	Accounts Receivables	$1050
	Sales Revenue		$1050
	(Being goods sold on credit)
Jan 13	Cost of goods sold	$700
	Inventory A/c		$700
	(Being cost of goods sold recorded)
Jan 20	Purchase A/c	$1120
	Accounts Payable		$1120
	(Being goods purchased on credit)
Jan 27	Accounts Receivables	$900
	Sales Revenue		$900
	(Being goods sold on credit)
Jan 27	Cost of goods sold	$650
	Inventory A/c		$650
	(Being cost of goods sold recorded)

Working:

As the FIFO method is being used, the cost of goods sold would be as follows:

1.

$\begin{array}{rcl}\mathrm{Cost}\mathrm{of}\mathrm{goods}\mathrm{sold}\mathrm{on}\mathrm{Jan}4& =& 80\mathrm{Units}\mathrm{of}\mathrm{Beginning}\mathrm{inventory}\times \mathrm{Cost}\mathrm{per}\mathrm{unit}\\ & =& 80\times 55\\ & =& \$400\end{array}$

2.

$\begin{array}{rcl}\mathrm{Cost}\mathrm{of}\mathrm{goods}\mathrm{sold}\mathrm{on}\mathrm{Jan}13& =& (20\mathrm{Units}\mathrm{of}\mathrm{beginning}\mathrm{inventory}\times \mathrm{Cost}\mathrm{per}\mathrm{unit})+(100\mathrm{Unitsfrom}\mathrm{Jan}11\mathrm{purchase}\times \mathrm{Cost}\mathrm{per}\mathrm{unit}\\ & =& (20\times 55)+(100\times 6)\\ & =& \$700\end{array}$

3.

$\begin{array}{rcl}\mathrm{Cost}\mathrm{of}\mathrm{goods}\mathrm{sold}\mathrm{on}\mathrm{Jan}27& =& (50\mathrm{Units}\mathrm{ofJan}11\mathrm{purchase}\times \mathrm{Cost}\mathrm{per}\mathrm{unit})+(50\mathrm{units}\mathrm{of}\mathrm{Jan}20\mathrm{Purchase}\times \mathrm{Cost}\mathrm{per}\mathrm{Unit})\\ & =& (50\times \$6)+(50\times \$7)\\ & =& \$650\end{array}$

4.

$\begin{array}{rcl}\mathrm{Cost}\mathrm{of}\mathrm{Ending}\mathrm{Inventory}& =& \mathrm{Total}\mathrm{value}\mathrm{of}\mathrm{goods}\mathrm{available}-\mathrm{Cost}\mathrm{of}\mathrm{goods}\mathrm{sold}\\ & =& \$2,520-\$1,750\\ & =& \$770\end{array}$

Gross Profit under the perpetual system

$\begin{array}{rcl}\mathrm{Gross}\mathrm{Profit}& =& \mathrm{Sales}-\mathrm{Cost}\mathrm{of}\mathrm{goods}\mathrm{sold}\\ & =& \$2,590-\$1,750\\ & =& \$840\end{array}$