Q. 9-5E - Intermediate Accounting (Kieso)

Question

Presented below is information related to Knight Enterprises. Jan. 31 Feb. 28 Mar. 31 Apr. 30 Inventory at cost \(15,000 \)15,100 \(17,000 \)14,000 Inventory at LCNRV 14,500 12,600 15,600 13,300 Purchases for the month 17,000 24,000 26,500 Sales for the month 29,000 35,000 40,000 Instructions (a) From the information, prepare (as far as the data permit) monthly income statements in columnar form for February, March, and April. The inventory is to be shown in the statement at cost; the gain or loss due to market fluctuations is to be shown separately (using a valuation account). (b) Prepare the journal entry required to establish the valuation account at January 31 and entries to adjust it monthly thereafter. E9-6 (L01) (LCNR

Step-by-Step Solution

Answer

1. Per the income statement, net income for February, March, and April equals $10,100, $14,000 and $11,200, respectively.
2. Journal entries are mentioned in Step 4.

Monthly income statement

(a) Monthly income statement is shown as follows: 

Income Statement
	February	March	April
Sales	$29,000	$35,000	$40,000
Cost of goods sold	16,900	22,100	29,500
Gross profit	12,100	12,900	10,500
Gain or loss due to market fluctuations of inventory	(2,000)	1,100	700
Net Income	$10,100	$14,000	$11,200

Statement of cost

Statement of cost is shown as follows:

	Feb. 28.	Mar. 31	Apr. 30
Beginning inventory	$15,000	$15,100	$17,000
Add: Purchases for month	17,000	24,000	26,500
Cost of goods available	32,000	39,100	43,500
Less: Ending inventory	15,100	17,000	14,000
Cost of goods sold	$16,900	$22,100	$29,500

Statement of gain or loss due to market fluctuations

Statement of gain or loss due to market fluctuations is shown as follows: 

Date	Inventory at Cost	Inventory at LNRV	Amount Required in Valuation Account	Gain (loss) due to market fluctuations of inventory
Jan. 31	$15,000	$14,500	$500
Feb. 28	15,100	12,600	2,500	$(2,000)
Mar. 31	17,000	15,600	1,400	1,100
Apr. 30	14,000	13,300	700	700

 

Journal entries

1. Journal entries are as follows:

Date	Accounts	Debit	Credit
Jan. 31	Loss due to market decline of inventory	$500
	Allowance to reduce inventory to market		$500
Feb. 28	Loss due to market decline of inventory	2,000
	Allowance to reduce inventory to market		2,000
Mar. 31	Allowance to reduce inventory to market	1,100
	Recovery of loss due to market decline of inventory		1,100
Apr. 30	Allowance to reduce inventory to market	$700
	Recovery of loss due to market decline of inventory		$700