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Chapter 5: Q5-6RQ (page 294)
What are the two types of inventory accounting systems? Briefly describe each.
The two major types of inventory accounting systems are periodic and perpetual inventory systems.
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What is inventory shrinkage? Describe the adjusting entry that would be recorded to account for inventory shrinkage.
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?
Journalize the following transactions that occurred in March 2018 for Double Company. Assume Double uses the periodic inventory system. No explanations are needed. Identify each accounts payable and accounts receivable with the vendor or customer name. Double estimates sales returns at the end of each month.
Mar. 3 Purchased merchandise inventory on account from Sidecki Wholesalers, \(5,500. Terms 2/15, n/EOM, FOB shipping point.
4 Paid freight bill of \)70 on March 3 purchase.
4 Purchased merchandise inventory for cash of \(1,100.
6 Returned \)900 of inventory from March 3 purchase.
8 Sold merchandise inventory to Herrick Company, \(3,400, on account. Terms 1/15, n/35.
9 Purchased merchandise inventory on account from Tex Wholesalers, \)5,600. Terms 2/10, n/30, FOB destination.
10 Made payment to Sidecki Wholesalers for goods purchased on March 3, less return and discount.
12 Received payment from Herrick Company, less discount.
13 After negotiations, received a \(500 allowance from Tex Wholesalers.
15 Sold merchandise inventory to Jesper Company, \)1,700, on account. Terms n/EOM.
22 Made payment, less allowance, to Tex Wholesalers for goods purchased on March 9.
23 Jesper Company returned \(300 of the merchandise sold on March 15.
25 Sold merchandise inventory to Salter for \)1,000 on account. Terms of 1/10, n/30 was offered, FOB shipping point.
29 Received payment from Salter, less discount.
30 Received payment from Jesper Company, less return.
D & T Printing Supplies’ accounting records include the following accounts at December 31, 2018.
Purchases \( 185,200 Accumulated Depreciation—Building \) 21,000
Accounts Payable 7,700 Cash 18,100
Rent Expense 8,600 Sales Revenue 257,800
Building 42,800 Depreciation Expense—Building 4,700
Common Stock 55,000 Dividends 26,500
Retained Earnings 30,400 Interest Expense 1,900
Merchandise Inventory,
Beginning 119,000 Merchandise Inventory,
Ending 102,100
Notes Payable 11,300 Purchase Returns and Allowances 20,700
Purchase Discounts 2,900
Requirements
1. Journalize the required closing entries for D & T Printing Supplies assuming that D & T uses the periodic inventory system.
2. Determine the ending balance in the Retained Earnings account.
Jeana’s Furniture’s unadjusted Merchandise Inventory account at year-end is \(69,000. The physical count of inventory came up with a total of \)67,600. Journalize the adjusting entry needed to account for inventory shrinkage.
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