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.
Inventory shrinkage expense for the company is $1,400.
In accounting, inventory shrinkage refers to the loss arising from the differences in the actual inventory balances and reported inventories in the books of accounts. Such a loss is reported in the books of accounts of all the business entities to reflect the accurate inventory balances.
Accounts and Explanation
Inventory shrinkage expenses
(To record the inventory shrinkage)
Suppose Muddyriver.com sells 2,000 books on account for $19 each (cost of these books is $22,800), credit terms 1/20, n/45 on October 10, to The Salem Store. The Salem Store paid the balance to Muddyriver.com on October 22.
1. Journalize the Salem Store’s October transactions.
2. Journalize Muddyriver.com’s October transactions. Assume Muddyriver.com uses the gross method to record sales revenue.
Party-Time T-Shirts sells T-shirts for parties at the local college. The company completed the first year of operations, and the shareholders are generally pleased with operating results as shown by the following income statement:
Year Ended December 31, 2017
Net Sales Revenue $350,000
Cost of Goods Sold 210,000
Gross Profit 140,000
Selling Expense 40,000
Administrative Expense 25,000
Net Income $75,000
Bill Hildebrand, the controller, is considering how to expand the business. He proposes two ways to increase profits to $100,000 during 2018.
a. Hildebrand believes he should advertise more heavily. He believes additional advertising costing $20,000 will increase net sales by 30% and leave administrative expense unchanged. Assume that Cost of Goods Sold will remain at the same percentage of net sales as in 2017, so if net sales increase in 2018, Cost of Goods Sold will increase proportionately.
b. Hildebrand proposes selling higher-margin merchandise, such as party dresses, in addition to the existing product line. An importer can supply a minimum of 1,000 dresses for $40 each; Party-Time can mark these dresses up 100% and sell them for $80. Hildebrand realizes he will have to advertise the new merchandise, and this advertising will cost $5,000. Party-Time can expect to sell only 80% of these dresses during the coming year.
Help Hildebrand determine which plan to pursue. Prepare a multi-step income statement for 2018 to show the expected net income under each plan.
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