Purple Beverages Inc. sells only one product, the very popular and strong Purple Rain drink. The drinks
are sold to local fraternity and sorority clubs. Purple Beverages Inc. had the following balances at
January 1, 2018:
Cash
Inventory
(1000 units of purple rain drink x $4 per unit)
Accounts receivable
Allowance for doubtful accounts
Contributed capital
Retained earnings
8,000 debit
4,000 debit
10,000 debit
1,000 credit
15,000 credit
6,000 credit
Other information:
1. Purple Beverages Inc. uses the perpetual method to account for its inventory and values its
inventory using the First-in First-Out basis.
2. Purple Beverages Inc. uses the aging method to determine its allowance for doubtful accounts
using the following rates:
Accounts not yet due
1%
Accounts 1-60 days overdue
10%
Accounts over 60 days overdue 20%
3. Trade terms are 2/10, net 30 on sales. No discount is available for early payment to suppliers.
The following were the only transactions that occurred during the first quarter of 2018:
Jan 15 Received $9,500 cash from the collection of accounts receivable.
Jan 30 Wrote off the remaining accounts receivable as uncollectible.
Feb 1
Purchased 1000 units of purple rain drink at $5 per unit.
Paid in cash.
Feb 10 Sold 1,000 units of purple rain drink at $7 per unit to the Gamma My Drinka Sorority on credit.
Feb 19 Received full payment from the Gamma My Drinka Sorority for the Feb. 10 sale.
Feb 23 Purchased 2000 units of purple rain drink at $6 per unit. Paid in cash.
Feb. 25 Sold 2000 units of purple rain drink at $8 per unit to the Sigma Big Ralph Fraternity on credit.
Mar 25 Received 1000 units of purple rain drink back from the Sigma Big Ralph Fraternity. The goods
were returned due to low sales. The low sales were as a result of some fool in the accounting area
scheduling a midterm the day after St. Patrick’s Day. Sigma Big Ralph Fraternity was given full credit for
the goods returned.
Required
1. Prepare the necessary journal entries to record all transactions during the quarter and any
necessary adjusting journal entries at the end of the quarter. Ignore income taxes.
2. Prepare a multi-step statement of earnings for the quarter ended March 31, 2018. Ignore
income taxes.
3. Would income be higher or lower if the average cost method was used to value inventory
(Please just indicate “higher”, “lower”, or “same”. No calculation is required).
Solution
You may wish to construct an inventory chart tracking inventory from beginning to the quarter to the
end of the quarter. While there are no marks for this, it is very helpful when answering an inventory
questions.
Opening inventory
February 1 purchase
Inventory after Feb 1. Purchase
Feb.10 sale
Inventory after Feb. 10 sale
February 23 purchase
Inventory after Feb. 23 purchase
February 25 sale
Inventory after February 25 sale
March 25 customer return
March 31 final balance
# units
1000
1000
2000
(1000)
1000
2000
3000
(1000)
(1000)
1000
1000
2000
Jan 15 Cash
Accounts receivable
Jan 30 Allowance for doubtful accounts
Accounts receivable
Feb 1
Inventory
Cash
Cost per unit
4.00
5.00
6.00
6.00
Total
4000
5000
9000
(4000)
5000
12000
17000
(5000)
(6000)
6000
6000
12000
dr 9,500
cr 9,500
½ mark
½ mark
4.00
6.00
5.00
6.00
500
500
½ mark
½ mark
5,000
½ mark
½ mark
7,000
½ mark
½ mark
4,000
1 mark*
1 mark*
5,000
Feb 10 Accounts receivables (1,000 x 7)
Sales
7,000
Feb 10 Cost of sales (1,000 x 4)
Inventory
4,000
* 2 marks in total. ½ mark for each of the four elements.
Feb 19 Sales discount (7000x2%)
Cash (7000 x 98%)
Accounts receivables
140
6,860
Feb 23 Inventory (2000 x 6)
Cash
12,000
Feb 25 Accounts receivable
Sales (2000 x 8)
16,000
Feb 25 Cost of sales (1000 x 5+ 1000x6)
Inventory
* 2 marks in total. ½ mark for each of the four elements.
11,000
Mar 25 Sales returns (1000 x 8)
Accounts receivable
8,000
Mar 25 Inventory (1000x6)
Cost of sales
6,000
Mar 31 Bad Debt expense
Allowance for doubtful accounts
* 2 marks in total. ½ mark for each of the four elements.
7,000
1 mark
½ mark
½ mark
12,000
½ mark
½ mark
16,000
½ mark
½ mark
11,000
1 mark*
1 mark*
8,000
½ mark
½ mark
6,000
½ mark
½ mark
300
300
1 mark*
1 mark*
Note: Allowance balance is 1,000 cr – 500dr = 500 cr; balance needs to be 8,000 balance of receivables x
10% = 800; required adjustment = 800-500=300
Purple Beverages Inc.
Statement of Earnings
1 mark*
For the three months ended March 31, 2018
* 1 mark if perfectly correct; ½ mark if partially incorrect; 0 mark if totally missing or incorrect.
Sales
Less:
Returns
Discounts
Net sales
Cost of sales (4000+11000-6000)
Gross Profit
Bad debt expense
$ 23,000
8,000
140
8,140
14,860
9,000
$ 5,860
300
½ mark
½ mark
½ mark
½ mark
½ mark
½ mark
Net earnings
Income would be lower under the average cost method.
$5560
1 mark