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Chapter 5: Q29RQ (page 295)
Is an adjusting entry needed for inventory shrinkage when using the periodic inventory system? Explain.
Answer
No adjusting entry is passed for the inventory shrinkage.
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Rae Philippe was a warehouse manager for Atkins Oilfield Supply, a business that operated across eight Western states. She was an old pro and had known most of the other warehouse managers for many years. Around December each year, auditors would come to do a physical count of the inventory at each warehouse. Recently, Rae’s brother started his own drilling company and persuaded Rae to “loan” him 80 joints of 5-inch drill pipe to use for his first well. He promised to have it back to Rae by December, but the well encountered problems and the pipe was still in the ground. Rae knew the auditors were on the way, so she called her friend Andy, who ran another Atkins warehouse. “Send me over 80 joints of 5-inch pipe tomorrow, and I’ll get them back to you ASAP,” said Rae. When the auditors came, all the pipe on the books was accounted for, and they filed a “no-exception” report.
Requirements
1. Is there anything the company or the auditors could do in the future to detect this kind of fraudulent practice?
2. How would this kind of action affect the financial performance of the company?
What are the two types of inventory accounting systems? Briefly describe each.
What does the gross profit percentage measure, and how is it calculated?
Ocean Life Boat Supply uses the periodic inventory method. The adjusted trial balance of Ocean Life Boat Supply at December 31, 2018, follows:
Requirements
1. Journalize the required closing entries at December 31, 2018. Assume ending Merchandise Inventory is $54,300.
2. Set up T-accounts for Income Summary; Retained Earnings; and Dividends. Post the closing entries to the T-accounts, and calculate their ending balances.
3. How much was Ocean Life’s net income or net loss?
Journalize the following transactions that occurred in June 2018 for Daley Company. Assume Daley uses the periodic inventory system. No explanations are needed. Identify each accounts payable and accounts receivable with the vendor or customer name. Daley estimates sales returns at the end of each month.
Jun. 3 Purchased merchandise inventory on account from Sherry Wholesalers, \(5,500. Terms 3/15, n/EOM, FOB shipping point.
4 Paid freight bill of \)42 on June 3 purchase.
4 Purchased merchandise inventory for cash of \(1,100.
6 Returned \)200 of inventory from June 3 purchase.
8 Sold merchandise inventory to Henrich Company, \(4,400, on account. Terms 2/15, n/35.
9 Purchased merchandise inventory on account from Tex Wholesalers, \)4,600. Terms 1/10, n/30, FOB destination.
10 Made payment to Sherry Wholesalers for goods purchased on June 3, less return and discount.
12 Received payment from Henrich Company, less discount.
13 After negotiations, received a \(300 allowance from Tex Wholesalers.
15 Sold merchandise inventory to Jarvis Company, \)1,500, on account. Terms n/EOM.
22 Made payment, less allowance, to Tex Wholesalers for goods purchased on June 9.
23 Jarvis Company returned \(100 of the merchandise sold on June 15.
25 Sold merchandise inventory to Smith for \)700 on account. Terms of 3/10, n/30 was offered, FOB shipping point.
29 Received payment from Smith, less discount.
30 Received payment from Jarvis Company, less return.
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